(Bloomberg) — South Korea and China just served oil traders with a little reminder that one the market’s brighter trades — diesel — is far from a one-way bet.
Combined exports from the two nations soared to an all-time high of about 34 million barrels in January, according to government data. South Korea’s shipments surge was the most eye-catching, reaching a record 20 million barrels.
An emerging theme in the oil market over the past year has been how increasingly light crude production, particularly in the U.S., is resulting in a gasoline glut, while supplies of products like diesel have remained more constrained. China’s shipments surge was in part caused by weak domestic demand for transport fuel, according to JBC Energy GmbH, a Vienna-based researcher.
“Presumably if this demand-side pressure continues, we can expect China’s drag on the wider market to be maintained until such point as crude runs in the country are actually constrained,” JBC said in a note, talking about the amount of crude that refineries turn into fuels. There are no signs of the plants curbing those processing rates at this stage, it said.
For South Korea, the exports surge is a function of refineries managing to churn out more diesel at the expense of other fuels, according to JBC. The plants yielded 6 percentage points more diesel over the past three months than a year earlier, according to JBC. A curtailment in buying of ultra-light oil from Iran probably contributed to that, as did changes in the country’s refining system, the researcher said.
Directly or indirectly, the extra supplies are resulting in more Asian diesel heading west. Traders are increasingly booking giant new-build supertankers, unsullied by hauling crude, to move Asian-made fuel to buyers in the Atlantic basin.
The heightened flows come at a time when European demand is showing signs of ebbing. Consumption in Germany fell to 650,000 barrels a day in December, a plunge of 8.2 percent from a year earlier, according to the most recent data from the International Energy Agency. November and October also showed big annualized declines. Wider European demand also dipped in the final two months of last year.
So far, European traders appear to be taking the view the market still needs the fuel that’s coming. Diesel costs about $16.50 a barrel more than crude oil at the moment in the Amsterdam-Rotterdam-Antwerp trading hub, according to ICE Futures Europe data. That’s the strongest for the time of year since 2015.
So-called time-spreads that are often considered by traders to be a measure of supply and demand, also remain strong in Europe. A ton of the fuel in April costs $2.25 a ton more than in May — a pricing structure that normally signals immediate inventories are tight.
“If Asian refineries increase exports further and use the Atlantic basin as a dumping ground then we could see diesel prices coming down,” said Steve Sawyer, a London-based analyst at industry consultant Facts Global Energy. “More barrels are coming into the Atlantic basin, they are fine as long as they are meeting demand but otherwise diesel prices will come down.”
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