European diesel margins sag before new shipping fuel rules

London - European diesel refining profit margins have tumbled as a slowing global economy has hit fuel demand harder than forecast despite expectations of a boost from new fuel shipping rules.

Refiners have raced to produce more low-sulphur fuel to meet the new standards set by the International Maritime Organization (IMO), known as IMO 2020, that take effect on Jan. 1. The rules require ships to use cleaner fuels, such as very low sulphur fuel oil (VLSFO) and marine gasoil (MGO), or to install equipment known as “scrubbers” to ensure they pump out less sulphur oxide pollutants. But instead of the switch causing a demand spike and boosting returns for makers of diesel, which is used as a blending stock for low sulphur marine fuels, inventories are now bigger than expected and margins are under pressure. Benchmark European diesel refining margins have fallen from a 2019 high in October above $19 a barrel to below $15 in mid-December. The front-month December contract has in recent days traded below the January contract, creating a market structure known as contango, associated with oversupply and rising stocks.

“Diesel margins have been rather soft into the fourth quarter due to weak global activities, lower refinery turnarounds and a warm start to the winter, while initial demand for transition to IMO 2020 is likely being met by inventory build for low sulphur fuels through 2019,” Goldman Sachs said.

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