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PADD 3 diesel exports surged in April as import demand strengthened from key consumers in Latin America and Europe - the latter seeking to progressively reduce its reliance on Russian supply. PADD 3 exports rose despite stronger domestic diesel demand, once again underlying the growing global competition for diesel.
As global product demand catches up to pre-covid levels, especially for road transportation fuels, refined product cracks, including diesel, are soaring. Product cracks are being driven by Europe and North America reducing exposure to Russian supplies, and in turn relying more upon local supplies or others beside Russia. This has been made more difficult due to a string of permanent/long running refinery closures that took place during the pandemic, ultimately reducing global refining capacity. Another crucial factor restricting global refined products exports is China, where widespread lockdowns have kept products exports below pre pandemic levels.
The combined impact of reduced refined product output and seaborne exports will likely keep product cracks supported in the near term as any shut in refining capacity will be slow to return.
Tight refined product markets are typically balanced by increased refinery runs, stock draws or demand destruction due to sustained high prices. But without room for short-term increases in refinery throughput levels, yield shifts can also provide some relief. However, we are entering into the high gasoline demand season for the US but US diesel demand and diesel import demand in Latam is also high - evident from product stocks falling to multi-year lows (JODI, EIA) even though refineries are already running near max capacity in both regions.
We can expect a strong fight for the molecules as yield shifts on their own will not provide a solution. Since diesel outside of Europe is used primarily for industrial activity and farming, it is less price- sensitive than gasoline - higher prices for the latter may force consumers to reduce transport or use more economical methods. Given the relative price inelasticity and current global tightness seen in diesel, we expect gasoline cracks to lag behind those for diesel in the medium term.
PADD 3 CPP exports (mbd) (excl LPG, Biofuels, other clean products)
As the average retail price of US diesel (EIA) reached a record high in the week ending May 02 and inventories sank to their lowest levels in almost 14 years (Argus), we can see PADD 3 refineries reaching run rates of nearly 95% (EIA), however instead of exporting volumes domestically, we see growing volumes loaded on vessels and headed transatlantic, especially to Latam and Europe.
PADD 3 diesel/gasoil exports by destination region (kbd)
High Latam refinery run rates have done relatively little to keep import flows in check
Even as Pemex’s refineries operate above 50% capacity for the first time in five years (Argus) and Salina Cruz’s refinery (315 kbd) restarts in April, we see rising Mexican diesel imports to accommodate accelerating post-Covid demand. Brazil’s refineries are also running near full capacity, hitting levels above 90% in March (Argus), but that has not stopped them from importing 50% more diesel in April m-o-m.
In Europe, although import volumes from PADD 3 are relatively small compared to Latam, transatlantic diesel flows have increased in the last two months to fill stocks amid self-sanctioning/in anticipation of a European ban on Russian oil products.
Looking forward, there is not much downside for refined product cracks. An example showcasing the huge diesel margins refiners can capture can be seen in India’s exports. The country exported a record-high of 800kbd in March, and April volumes, though lower m-o-m, still remain at high levels. Unlike strategic petroleum reserves (SPR) for crude oil, there are no large global refined product inventories, and although additional refining capacity is expected to come online in the Middle East and in China by the end of this year, refineries are slow to start up. Any new capacity in China will be challenging due to export restrictions, and possibly due to ongoing covid lockdowns in the country. As the European Union seeks to further restrict Russian oil product supplies, some countries will no doubt be looking to re-kit their refineries and invest in pipelines, but that will take years of planning and high investment. In the meantime, refineries that can produce large volumes of diesel, such as those in PADD 3, will continue to do so.
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