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(Bloomberg) — Demand for gasoil in Europe is set to plunge below the depths of Covid-19 this year, as weak manufacturing and structural shifts in the region’s car fleet take their toll.
Annual consumption — most of which is road diesel, used by cars and trucks — in OECD Europe is forecast to be more than 3% lower than during the first year of the pandemic, according to the Paris-based International Energy Agency. That’s a striking decline, given that 2020 saw widespread lockdowns and restrictions on movement that curbed economic activity and fuel demand.
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Accounting for more than one in 20 barrels of global consumption, Europe’s gasoil demand is an important piece of the wider oil market jigsaw. The region can’t make enough of the fuel, making it an important destination for many refineries around the world to send any surpluses they might produce.
As well as being a fuel for cars and trucks, gasoil can also be used in heating, manufacturing and by the shipping industry. That means consumption is tied to both the temperature and economic activity.
“A mild winter depressed heating oil demand in northern European markets through January and February,” said Iain Mowat, principal analyst for oils and chemicals at consultant Wood Mackenzie Ltd. “This has been compounded by the poor performance of Europe’s manufacturing sector, which remains weaker than in all other regions.”
In an oil market facing a tougher demand backdrop, tumbling consumption of Europe’s most popular petroleum product is another potential reason for OPEC+ to be cautious about implementing a provisional plan to restore crude output.
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Driver Shift
Demand is also being hampered by structural shifts in the kinds of cars that Europeans want to drive.
Diesel’s share of new European Union car registrations during January-June was just 13%, down from 37% back in 2018, according to figures from the European Automobile Manufacturers’ Association.
The switchover has been helping to suppress demand for the road fuel in multiple European countries for months.
Different Diesels
It’s worth noting that while demand specifically for diesel is declining in the IEA’s numbers, it’s not quite as low as it was in 2020. However, a sharp drop in what the agency calls other gasoil — including oil used for heating, shipping and by the agricultural industry — is expected to more than push overall annual consumption below pandemic levels.
Still, it’s not all bad news. While the profit oil refiners make from producing diesel has been declining in recent weeks, its premium to crude oil is still higher than the 10-year historical seasonal average, if 2022 and 2023 — years which saw exceptional prices following Russia’s invasion of Ukraine — are excluded.
Next year should also see a recovery in European industrial production, according to Mowat at WoodMac. That, as well as a new rule mandating lower-sulfur ship fuel in the Mediterranean, should support overall gasoil demand, he said.
—With assistance from Rachel Graham and Bill Lehane.
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