Diesel Decouples From Brent in Europe as Deficit Deepens — NRG-IA

Diesel has become one of the most tightly supplied products in the European oil market. For the first time in over a year, diesel cargoes are priced higher than aviation fuel, while Europe's imports are falling, exports from major supplying regions are contracting, and refineries are processing significantly less crude than last year. The contrast is all the more striking as crude oil is no longer moving in the same direction. On August 13, Brent lost 2.1% to close at $87.07 per barrel, following a sharp rise in US crude inventories and amid weaker demand outlooks. However, diesel remains under pressure because the market's issue is no longer just how much oil exists, but how much diesel can actually be produced and transported to the regions that need it. In Europe, diesel imports fell from 1.97 million barrels per day (bpd) in January to 1.56 million bpd in July, a reduction of approximately 21%. Conversely, jet fuel imports rose from 612,000 bpd in January to around 750,000 bpd in June and July. This divergence explains the unusual reversal between the two products: Europe has managed to source aviation fuel more easily from the US, Nigeria, and other sources, while diesel availability has continued to deteriorate. Europe finds it harder to source diesel than aviation fuel The spread between diesel and jet fuel is not driven by a single disruption. Multiple shocks have hit the distillate supply chain simultaneously. According to the International Energy Agency (IEA), diesel exports from Russia, the Middle East, and Asia in July were 1.3 million bpd below the levels of the same period last year. This missing volume is equivalent to about 20% of the entire global seaborne diesel trade. At the same time, global refineries processed 80.9 million bpd in July, nearly 5 million bpd less than a year earlier. Available capacity in other regions failed to fully offset the losses and disruptions in major exporting hubs. The result is visible in refining margins. The European premium of low-sulfur gasoil over Brent had already reached record levels by late July, and the spread between the value of crude and the finished product has remained unusually wide. This spread is crucial for the final price. A cheaper barrel of Brent helps refineries, but if the market simultaneously pays an increasing premium to turn that barrel into diesel, a significant portion of the raw material's price drop can be absorbed before the product reaches distribution. The problem has shifted from crude oil to refining and the finished product The price of diesel is not determined solely by the price of crude oil. Between a barrel of Brent and a liter of diesel lie refining, distillate yields, product availability, transport, logistical costs, regional benchmarks, exchange rates, taxes, and distribution. In the current market, it is precisely the links downstream of crude oil that have become the primary constraint. Attacks on Russian refineries have reduced processing capacity and the availability of products for export. Moscow has simultaneously intervened in exports to protect its domestic market, further limiting the volumes accessible to foreign buyers. In the Middle East, the issue is not limited to risks to crude exports. The region is also one of the world's major suppliers of refined products. The shutdown of Saudi Arabia's Jazan refinery, which has a processing capacity of 400,000 bpd, temporarily removed a significant source of fuel from the market. In the months leading up to the shutdown, the facility had exported over 200,000 bpd of petroleum products, with diesel and gasoil accounting for a major share. The restart of Jazan is currently scheduled for August 30. However, the IEA estimates that export disruptions in the Middle East and attacks on Russian refineries have reduced the global third-quarter refining forecast by another 370,000 bpd. Diesel and jet fuel are now moving in opposite directions The reversal of the relationship between diesel and aviation fuel is also amplified by the fact that the jet fuel market has eased relatively. Europe has attracted additional volumes from the US, Nigeria, and other sources, with imports rising to around 750,000 bpd. Furthermore, the approaching end of the summer season is progressively reducing the seasonal pressure exerted by aviation. On August 10, a jet fuel cargo delivered to Europe was valued at a discount of $24 per ton against gasoil futures, the widest such gap since July 2023. Diesel is in the opposite situation. Road transport, logistics, agriculture, and numerous industrial processes support demand that is less dependent on the holiday season, while the supply available to Europe has contracted. According to Reuters, Goldman Sachs believes that the risk of persistent "scarcity pricing" is higher for diesel than for crude ahead of winter. This is a market assessment, but IEA data provides the factual basis for this risk: lower trade flows, refineries processing less, and…