Jack Wittels, Elizabeth Low and Chunzi Xu
Sat, November 4, 2023
(Bloomberg) -- If the oil market offers clues about the state of the economy, it’s through the prism of two petroleum products: diesel and naphtha. And in Europe, the news is bleak.
The former powers trucks, trains, ships and industries including farming and construction. The latter is used by the petrochemical sector to make everything from medical equipment to chewing gum. OECD Europe’s annual consumption of both is set to plunge this year, with naphtha hitting its lowest since 1975.
“Europe’s weak economic growth has hit the manufacturing sector hard,” said Alan Gelder, vice president of refining, chemicals and oil markets at consultancy Wood Mackenzie Ltd. That’s reduced “demand for naphtha as a petrochemical feedstock and diesel for the manufacturing and movement of goods.”
The continent’s demand is still critically important even in a world where traders are intently focused on the potential for supply disruptions emanating from war in the Middle East. The expected consumption drop in the two fuel types this year is well over half a million barrels-a-day versus pre-pandemic levels — not far off a Belgium’s worth of overall oil usage.
As a major importer of diesel-type fuel from the Middle East, India and the US, and a regular exporter of naphtha to East Asia and Latin America, any significant drop in Europe’s usage is likely to have knock-on effects for economies and oil markets around the world.
Part of this year’s demand decline is due to long-term, structural trends. Buyers in the European Union have long been favoring gasoline-powered options over diesel, and electric car sales have also hit consumption.
But Europe’s economic malaise is a big factor too. Purchasing managers’ index data show ongoing contractions in the euro zone’s construction and manufacturing, while inflation remains above target. Germany’s economy, the European Union’s largest, shrank last quarter and is at risk of entering recession.
The numbers on naphtha are stark: consumption is set to fall more than a quarter this year versus 2021 to 844,000 barrels-a-day, the lowest it’s been in 48 years, according to Ciaran Healy, an oil market analyst at the International Energy Agency. While naphtha is also used in blending to make gasoline, the watchdog’s consumption measurement doesn’t include this uptake — instead, the vast majority is for use as a petrochemical feedstock.
Run rates at petrochemical steam crackers — huge units that convert naphtha and other feedstock into the industry’s basic chemical building blocks — have plunged, according to data from Argus Media Ltd. Producer OMV AG on Tuesday also dropped its forecast for European steam cracker utilization.
Petrochemical giant BASF SE meanwhile attributed slower European chemical production to “lower demand resulting from high inflation, increased interest rates, and a renewed rise in natural gas prices” on Tuesday.
Diesel Downtrend
In the continent’s top five economies — Germany, France, the UK, Italy and Spain — recent data all show contractions in demand for diesel-type fuel.
French road diesel sales fell by 13.4% versus a year earlier in September. In Germany, overall oil demand is expected to drop by about 90,000 barrels-a-day this year, more than any other country in the world — bar Pakistan.
See also: German Oil Demand Drops as Europe’s Industrial Powerhouse Stalls
Overall, OECD Europe’s diesel-type fuel demand is set to be down by about 380,000 barrels-a-day this year versus the 2019 pre-pandemic level, according to the IEA.
Mixed Picture
The global picture is more mixed. In China, demand is booming despite the travails of its property sector: during January-August of this year, diesel-type fuel was up by 40% versus the same period in 2019 and naphtha consumption has more than doubled in the corresponding period, according to JODI data.
China has seen massive investment in petrochemical capacity. A jump in production has pushed many of the industry’s products — such as ethylene, propylene and aromatics into oversupply — even as they’ve boosted the country’s attractiveness as a manufacturing hub, said Amber Liu, Asia head of petrochemical analytics for ICIS.
“China has some of the most efficient supply chains — after the petrochemicals expansions — so the prices of China’s finished products are extremely competitive compared to other countries,” said Liu.
In the US, implied demand for distillates — which include diesel and heating oil — has fallen below seasonal norms in the past few weeks.
Going forward, the nation’s distillates demand is expected to stay below that of year-ago levels in the fourth quarter before picking up early next year, according to government forecasts.
Still, the trucking industry is showing signs of nascent recovery, and rail freight is rising as well, analysts at JPMorgan said.
Naphtha is typically used to make gasoline in the US while cheaper natural gas liquids — a byproduct of drilling shale oil — have become the preferred feedstock for petrochemicals.
For Europe, “the outlook for 2024 remains weak for both products,” Gelder said.
--With assistance from Rachel Graham.
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