Dec 20, 2021
The outlook for road fuels in Europe looks finely poised in 2022, after a highly volatile year, as tighter fundamentals could provide some support. But there is still ample uncertainty as to how the infectious omicron COVID-19 variant will impact oil demand and mobility globally.
Stocks of key middle distillates are running quite low in Europe, with demand reaching pre-pandemic levels in many countries even as outright prices have risen by about 50% since early-2021. But the picture for transport fuels in early 2022 is heavily clouded by concerns from the spread of the omicron variant.
If travel restrictions and more lockdowns are put in place across Europe, the market could see a swing back toward greater jet fuel blending into diesel and lower mobility, resulting in lower demand for gasoline and diesel.
Gasoline and gasoil demand will both gain about 4% — or roughly 1 million b/d — in 2022, while jet fuel will post the strongest percentage and volume gains in 2022 at 31% — or 1.7 million b/d — according to the latest forecast by S&P Global Platts Analytics.
“Omicron variant’s impact on global oil demand is notable in the short run. Growth will be weak in Q1 2022, both seasonally driven and omicron induced. However, the global oil demand recovery continues,” Platts Analytics said in a recent note.
European refineries saw their margins improve in 2021. But by Q4, runs were down due to a surge in natural gas prices, which resulted in high operating costs for refiners, affecting their economics, especially those units with hydrocrackers and hydrotreaters.
A number of refiners in Northwest Europe halted units temporarily, and others had to reduce runs again.
This trend is expected to last through the winter, and will tighten product balances and widen product cracks, according to Platts Analytics.
European diesel markets were characterized by a steady drawdown of stocks and fairly robust demand in 2021, with market participants setting their sights on a tighter fundamental picture in 2022, provided the omicron variant is not too disruptive.
Diesel consumption was pegged to have returned to around 90% of pre-pandemic levels as early as Q2, supported mainly by the trucking industry, while new working-from-home patterns continued to alter demand dynamics.
The market firmed further in H2 as the forward curve flipped into backwardation, supported by fewer Russian exports and low refinery production. The FOB ARA ULSD barge vs the Dated Brent crack spread reached its highest level since April 2020 at $14.97/b Oct. 15, Platts data showed.
However, higher cracks have not been fully representative of refining margins as sky-rocketing feedstock costs for desulfurization and hydrocracking units in Q3 saw refiners trim throughput at these units, affecting diesel supply.
The import arbitrage from East of Suez has been key to maintaining diesel availability throughout the year, with imports peaking in November.
The European gasoline market has observed a very eventful and buoyant year in terms of demand and crack spreads. But with more mobility restrictions expected in the continent, gasoline could see more volatility in 2022.
Gasoline demand fell in November due to lockdowns in Austria and increased restrictions in countries such as the Netherlands and Germany. But there was a slight rebound in the run-up to Christmas as refinery run cuts removed some length from the market.
The markets in Europe have also been kept tight on the back of reduced exports from the US, and strong buying interest for European gasoline in West Africa — a reminder that transportation demand remains strong in several key global markets.
In industry news, the UK finally changed the standard gasoline specification from E5 to E10, which can contain up to 10% ethanol.
E10 was already in use across much of Europe, with France the greatest European consumer of the fuel. The UK switch to E10 on Sept. 1 boosted interest for non-oxygenated gasoline and the premium of E10 FOB AR gasoline barges to Eurobob E5 FOB AR barges increased from an average of $4.20/mt before Sept. 1 to $7.30/mt for the remainder of 2021.
Gasoil demand in Europe could be dented as many countries shun the fuel in the name of decarbonization.
Consumption for 0.1% and 50 ppm sulfur gasoil barges broadly followed seasonal patterns in 2021, while toward the end of the year a surge in natural gas prices brought support to the cargo markets, in particular in the Mediterranean, as some refineries and power plants switched to gasoil from natural gases to produce electric power.
But the use of 0.1% gasoil and 50 ppm gasoil as heating oil was expected to continue to decline as end-users are encouraged to switch from their polluting boilers to electric heating pumps.
While in France the sale of new heating oil boilers will be banned from July 1, 2022 — a year later than initially planned — in the Netherlands, Austria, Germany and Switzerland, a rise in CO2 tax will push up the cost of gasoil.
For Germany, the tax will rise from Eur25/mt ($28.23/mt) of CO2 to Eur30/mt of CO2, which will lift prices for gasoil and diesel by 8 cents/liter.