A mixed bag for refined products | Item
Middle distillates must be supported by jet recovery
The diesel market still has room to strengthen in 2022; this assumes we don’t see any further tightening of Covid restrictions Middle distillate stocks are below 5-year averages in the US, northwestern Europe and Singapore. In fact, in Northwest Europe and Singapore, stocks are at least at a 5-year low, while in the US, they aren’t too far off the 5-year low.
China has been a supporting factor for the diesel market for much of this year. 2021 is shaping up to be the second consecutive year of year-on-year decline in diesel exports. The drop in flows last year was understandable given the Covid-19. However, the decline in exports this year reflects a tighter domestic product market in China and reduced export quotas for the products. Part of the market tightening is due to changes in consumption taxes in the domestic market, which have resulted in lower imports of light cycle oil into China, which is used to blend with diesel.
The Chinese market is likely to be less favorable by 2022. The country’s refiners have increased production to bolster domestic supply and as a result we will likely start to see diesel exports pick up and more products become available. However, while there is a rise from the low levels seen in 2021, we are unlikely to see a return to pre-Covid export levels due to policy changes.
In any event, middle distillates should be relatively well supported throughout the winter, particularly given the tension observed in other energy markets, which would lead to certain changes. A continued upturn in international air travel in 2022 is expected to provide further uptick in the jet fuel market, which in turn is expected to drive the diesel market up. The total air travel in the world is still in significant decline. The latest figures from IATA show that revenue passenger-kilometers in October 2021 were still down more than 49% from 2019 levels.
The combination of a further upturn in demand for middle distillates and an entry into the new year with low inventories suggests that cracks will increase slightly in 2022. We estimate that the crack of ICE diesel will average US $ 13 / b next year, down from around US $ 8. bbl this year. The main downside risks will be that Covid will continue to control international air travel and that Chinese diesel export volumes will return to pre-Covid levels.