European supply tightness keeps middle distillate margins firm
In this insight, we explore global middle distillate flows and look for where the push and pull elements are to identify what could be keeping cracks firm.
Growing middle distillate seaborne exports from the Wider Arabian Sea have been the defining element in the global product market since 2024, impacting refining margins in both the Atlantic and Pacific Basin. However, despite a weak global middle distillates demand forecast, cracks have held firm into the summer. Northwest Europe and the Med look to be offering support as flows pile into import hubs, keeping margins strong despite poor underlying demand.
Wider Arabian Sea exports squeeze margins
Wider Arabian Sea (WArS) middle distillates exports have reached seasonal monthly highs on three occasions so far this year, supplying an average of 2.9mbd to global markets in the first five months, a 5% y-o-y jump. With Asia-Pacific import demand weakness heading into the summer (read more here), Pacific Basin middle distillates imports in May are down 5% y-o-y. Surplus volumes coming from India West Coast and the Middle East Gulf are nevertheless being absorbed by demand pockets in Europe, keeping cracks firm despite poor end-use forecasts.
Local supply constraints boosts European import demand
Meanwhile, European refineries have faced a longer turnaround season this year, driven in part by unplanned outages. As a result, Mediterranean middle distillate imports hit a dataset-high of 1.9mbd in May, marking three consecutive months above the ten-year seasonal peak. Spain and Italy account for 23% of this flow so far in Q2, with Spain’s diesel/gasoil imports reaching a dataset-high of 217kbd in April, a 65% jump m-o-m. A series of outages at the Bilbao refinery (220kbd, Argus) has tightened inland supplies, driving import demand for excess Wider Arabian Sea barrels.
In Northwest Europe (NWE), low refinery runs due to a prolonged refinery maintenance season have prompted local distributors to tap into ARA stocks. In May, with ARA gasoil stocks at their lowest level in 15 months, and outages at large refineries ongoing (e.g. Rotterdam refinery, 400kbd, Argus), NWE buyers are now looking to increase imports of seaborne diesel barrels.
At the same time, PADD 3 diesel/gasoil exports to NWE rose to their highest volume of the year in May, rising 125% y-o-y. A tighter spring refinery landscape in Europe has prompted buyers to take PADD 3 diesel/gasoil barrels, even though PADD 1 gasoil stocks sit at 5-year lows (EIA), effectively providing a lifeline to these barrels as domestic demand wanes.
European jet/kero brings some demand-side support
Despite disappointing diesel demand, jet/kero seems to be supporting middle distillates going into the summer. A more positive outlook on summer air travel demand has led to rapid jet fuel stockbuilding in ARA, with NWE and Med imports of jet/kero from outside regions jumping by 34% in May m-o-m. Refiners globally have already pushed jet yields quite high (see chart below), yet jet regrades have remained flat m-o-m, limiting refiner profitability amid Europe’s higher demand for external jet barrels.
Looking forward, it will be particularly important to watch the middle distillate flows out of the Wider Arabian Sea to forecast the impact they could have on refinery margins in the Atlantic and/or Pacific Basins. Due to lack of supplies domestically, any impending Middle East refinery maintenance or increased transits via the Red Sea could have an outsized impact on margins.
