Europe’s diesel market is crawling toward recovery, mirroring an uncertain and uneven re-emergence of the continent’s largest economies from Covid-19.

The fuel’s premium to crude — how profitable it is for oil refineries — stands at about $6.20 a barrel, according to ICE Futures Europe data. While that’s up from a low of $2 in September, it’s still by far the weakest for the time of year in over a decade. Another gauge, reflecting tightness of supply, briefly pointed to a tighter market around the middle of February as freezing U.S. weather lifted the global market. It has since flipped back to indicating surplus.

Bad But Less Bad

European diesel margins are recovering from a low base , while the market’s pickup from late last year reflected a global freight boom as people diverted spending toward goods and away from services, the next leg of diesel’s recovery hinges on how fast the region’s economies can ease restrictions to combat the spread of Covid-19. To that end, the paths of the continent’s four largest — Germany, the U.K., France and Italy — look mixed.

“As lockdowns ease and confidence returns, we can expect to see stronger diesel demand even within the next few weeks,” said Jonathan Leitch, director of EMEARC consulting at Turner, Mason & Co. “However, mobility is still depressed so any increase is likely to be slow until we see more of Europe open up as we move through to summer.”

Mixed Messages

In Germany, Chancellor Angela Merkel has backed a relaxation of coronavirus restrictions despite a stubbornly high infection rate, acknowledging that many Germans are weary of curbs on daily life after months of lockdown. The U.K. has now given almost a third of its population at least one vaccine shot and is aiming to reopen schools on Monday as part of a wider restart program. By contrast, France is considering tighter restrictions on 20 regions while Italy is tightening measures in some areas after a surge in cases.

The four countries’ combined diesel consumption of 2.13 million barrels a day last year accounted for 17 percent of all OECD Europe’s oil demand, according to figures from the International Energy Agency, the Paris-based adviser to governments.

The fate of diesel matters beyond the confines of a narrow group of European fuel traders. The petroleum product, often viewed as an indicator of economic health, is central to the profitability of the region’s refiners, which in turn help to fire global demand for crude. The Organization of Petroleum Exporting Countries and allied nations will on Thursday meet to discuss whether or not to add oil supply to the global market.

Overall, Europe’s consumption of diesel-type fuels is expected to average about 6.5 million barrels a day during February-June, according to Energy Aspects Ltd., an industry consultant. While that’s an increase from January, it’s still down by about 5% from 2019 levels.

The views of oil company traders and analysts are mixed about what comes next. Of half a dozen spoken to for this story, two saw little sign of any imminent demand recovery, two others talked about it picking up in April, one saw high demand in OECD Europe, and another said he thought German demand was rising.

But even if demand does return, there are other headwinds for diesel. Europe’s oil refineries are currently thought to be curbing the amount of crude they process, something they could quickly change if consumption picks up. Similarly, Covid-19 saw a buildup of stockpiles of the fuel, and those need to be cleared before the market can normalize — even if that’s beginning to happen.

“The incremental month-on-month increase, for us, is going to be relatively low,” said Koen Wessels, an oil products analyst at Energy Aspects. “Even if there is a pick up in, say, ultra low-sulfur diesel demand, this will be somewhat offset by seasonally softer heating oil demand.”

Bloomberg, by Jack Wittels, March 11, 2021