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Global diesel shortages proving to be saviour for oil marketing companies

ICICI Securities 24 Mar 2022

What’s Buzzing:

Diesel shortages in the US, Europe, Singapore (compounded by western sanctions on Russia – which is a major supplier of diesel) has lead to MoM doubling of diesel product crack (i.e. difference between crude oil price and diesel price).

Context:  

Diesel inventories in Europe and the US are down 8% (35 million barrels) and 21% (30 million barrels), respectively, in mid-March (Reuters) compared to five-year seasonal average of pre-Covid era. While consumption recovered across the world with easing of Covid-19 restrictions, production lagged behind, resulting in a depletion in diesel stocks.

Our Perspective: 

Singapore gasoil cracks were trading in the range of ~US$17-18/bbl in February. They have strengthened to ~US$35/bbl in March. Russia is one of the key suppliers of diesel (as per data from Eurostat, Russia comprised ~20% of Europe diesel imports in CY19) and economic sanctions on it by western countries have contributed to supply tightness. Demand from China amid renewed Covid restrictions will be a key monitorable. From an Indian perspective, diesel accounts for ~40% of petroleum products consumption and consumption in FY22-TD, lagging behind FY20. Diesel cracks are important as they constitute more than 40% of refining yield. If sustained at higher level, refineries will benefit. On the refining front, oil marketing companies (OMCs) will also benefit from inventory gains. Refining will be a saviour for OMCs as it will partially soften the impact of negative marketing margins (in March) for OMCs.

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