Northwest European cracking margins for 0.1% gasoil and ultra low sulfur diesel have hit long-term lows, which has led to expectations that refineries across Europe will start cutting runs, sources said.

The FOB ARA ULSD crack fell $1.12/b to $1.50/b on Sept. 16, S&P Global Platts data showed, the lowest in data going back to October 2002.

The 0.1% gasoil crack also fell $1.12/b, to reach 33 cents/b, the lowest in Platts data going back to November 2007.

“The key for the Northwest European diesel market is whether or not refineries will cut runs," a diesel trader said, adding they should in theory due to poor margins but might not.

“It is the runs cuts and the turnarounds of refineries that could change the situation,” a second trader said.

According to a third diesel trader, refining was not profitable for many players. “With the refinery margins that are so low, we see some refiners starting to cut runs,” he said

In the Mediterranean, some refineries have already started to reduce production rates.

The third trader said a few Mediterranean refiners had been buying product, while Greek refiners were likely to cut runs. “The diesel market should rebalance a bit with the run cuts," he said.

According to a fourth trader, some East Mediterranean refineries seemed to be “churning out diesel” despite the weak cracks and generally disappointing demand. “The big solver is run cuts, the big question is when they will come.”

Falling demand

“Product demand is still underwhelming and, indeed, European distillates are bearing the brunt of the uncertainty," Global Risk management trader Alexander Black said.

"Gasoil cracks recent performance being the ‘standard-bearer’ for a slowdown in demand improvement, and also the increased possibility that we’ll see further bi-lateral quarantines imposed in Europe.”

ULSD demand has not fully recovered despite the lifting of COVID-19 lockdowns across Europe.

According to the fourth diesel trader, the Mediterranean has been drifting from the summer highs. "Diesel demand peaked in July-August...The data will have to show a drop in demand since the peak," he said, adding ULSD demand in Italy had reached around 93% of last year a few weeks ago but had since trended lower.

"ULSD cargoes are incredibly cheap at the moment. There is just not the CIF demand," he also said.

Demand for heating oil in Europe was thin amid high inland stocks after storage tanks were filled in the spring when flat prices were much lower and the contango particularly deep. Demand was not expected to pick up until winter heating kicks in and stocks built in the spring start to draw.

However, there was a bit of demand for the blending gasoil into marine fuels and other higher sulfur gasoils to be exported to West Africa, sources said.

Gasoline

In contrast to gasoil and ULSD cracks, the gasoline crack has risen during September to be assessed at $3.25/b on Sept. 16, from a low of $1.30/b on Sept. 1.

In Northwest Europe, sources have pointed to demand in the UK, and export buying interest from the US and West African markets. In the week to Sept. 10, Insights Global data showed a 3% stock drawdown in Amsterdam-Rotterdam-Antwerp gasoline inventories.

“Gasoline demand in Northwest Europe has been good outside of the ARA,” a trader said.

The picture was not the same across the continent, however, with tight supply and weakening demand in the Mediterranean.

The gasoline crack has averaged $2.21/b during September, compared with the $4.8/b seen over the same period in 2019. That is likely to continue hurting refining margins, and deter refiners from raising gasoline production rates into the winter.