European diesel refining profit margins have fallen as a slowing global economy has hit fuel demand harder than estimate despite expectations of a lift from new fuel shipping guidelines.
Refiners have raced to produce more low-sulfur gasoline to meet the new requirements set by the International Maritime Organization (IMO), called IMO 2020, that take effect on January 1, 2020.
The guidelines demand ships to use cleaner fuels, such as very low sulfur fuel oil (VLSFO) and marine gas oil (MGO), or to put in gear known as “scrubbers” to make sure they pump out less sulfur oxide pollutants.
However, instead of the switch inflicting a demand spike and boosting returns for makers of diesel, which is employed as a blending stock for low sulfur marine fuels, inventories at the moment are bigger than anticipated, and margins are under strain.
Benchmark European diesel refining margins have dropped from a 2019 high in October above $19 per barrel to below $15 in mid-December.
The front-month December agreement has, in recent days, traded below the January pact, creating a market structure known as contango, related to supply glut and rising inventory.
The bank mentioned in its a note that refiners need to wait until 2020 to see a boost from the shipping business as global trade picked up.
Alongside a global economic slowdown damaging demand more than expected, refinery output has surpassed expectations as turnarounds in maintenance work has been shorter than estimations.
Much of the excess diesel production, mainly from Asia and the Middle East, has headed to Europe, a crucial importer because of its large fleet of diesel cars.