Asian refiners face the dilemma of diesel surplus

Recently, analysts and trade sources have stated that driven by the production of new oil refineries in the Middle East and strong exports from China, Asian diesel supply will significantly increase in 2024 and may exceed demand growth in the region. Therefore, diesel prices are expected to decline, indicating that Asian refiners are facing a second consecutive year of declining diesel profit margins.

In 2022, the average diesel profit margin surged to a historic high of $45 per barrel due to supply disruptions from Russia, the world's largest diesel exporter, and global diesel inventories falling to record lows. After China allowed more fuel exports and refineries around the world increased production, the average diesel profit margin in 2023 decreased by nearly 50%. According to consulting firms Rystad Energy, Sparta Commodities, and FGE, the average profit margin of diesel may decrease by 23% to around $18 per barrel in 2024 as supply increases. "Since October 2023, diesel profit margins have been declining not only in Europe but also globally, and may continue until 2024," said James Noel Beswick, an analyst at Sparta Commodities

Consulting firm Wood McKenzie estimates that diesel supply in Asia, including the Middle East, is expected to increase by around 3.8% year-on-year in 2024. Analysts say that although Asia, led by China and India, will continue to drive global diesel demand in 2024 through transportation and construction industries, diesel profit margins may decline. According to Rystad Energy, diesel demand in the Asian region is expected to increase by approximately 3% in 2024. In contrast, data from the International Energy Agency shows that global diesel demand increased by approximately 1% in 2024. Rystad Energy stated that the growth of 260000 barrels per day in Asian diesel demand in 2024 was mainly from China and India, with 164000 barrels per day and 113000 barrels per day, respectively.

When the Al Zour new refinery in Kuwait and the Duqum new refinery in Oman increase production and exports, diesel supply from the Middle East will increase. According to FGE data, it is expected that the average monthly diesel production in the Middle East will increase from 3.04 million barrels per day in 2023 to 3.12 million barrels per day in 2024, while the year-on-year growth in demand in the Middle East may remain stable. Although most diesel exports from the Middle East tend to go to Europe, Noel Beswick suggests that the erosion of Western demand may lead to more diesel trade flowing to the East. Vortex analyst Serena Huang suggests that Singapore, Malaysia, and Pakistan may be destinations for diesel exports from the Middle East. This will mean intensified competition between Middle Eastern diesel and Asian diesel, and if demand lags behind, it may drag down diesel profit margins in the Asian region.