2025 global diesel market: outlook and expectations
Commentary summary:
– Supply tightness to ease at the end of Q2 2025: Increasing global refinery runs and the possible return of Chinese diesel exports are expected to ease supply constraints by the end of Q2 2025.
– Arbitrage dynamics to shift: USGC to Europe and Middle Eastern flows will adapt to evolving freight rates and regional demand.
– Colder winter impact: A potentially colder Q1 could provide early-year support for prices, though medium-term pressures suggest a bearish pivot.
– Maintenance cycles crucial: Scheduled maintenance across the US, Europe, and Asia in Q1 will shape near-term supply challenges, with significant impacts expected into Q2.
Short-term pressures and winter uncertainty.
The opening months of 2025 present a complex landscape for diesel markets, with bullish signals tempered by emerging medium-term headwinds.
A colder-than-average winter could sustain robust demand across the Atlantic Basin, amplifying heating oil requirements and straining already tight US Gulf Coast (USGC) supply.
While USGC refinery runs remain strong, upcoming maintenance in February is poised to disrupt export flows to Europe.
Arbitrage dynamics are in flux. The USGC Transatlantic (TA) arb has been constrained by elevated TC14 freight rates and narrowing USGC diesel differentials but increased vessel availability suggest the route could reopen for January arrivals into Europe.
Simultaneously, Middle Eastern diesel continues to flow East, driven by firm demand in Asia and Australasia.
Supply challenges are further compounded by refinery maintenance across Europe, the Middle East, and the US, which will peak in Q1/Q2. This tightens markets and supports Q1 spreads. However, improving global refinery margins signal that post-turnaround recovery could provide significant supply relief.
In summary, while early 2025 may sustain bullish momentum on the back of winter demand and closed arbs, the pace of arbitrage reopenings and the resolution of global maintenance will determine the longevity of price support. Winter weather will remain a key factor to monitor.
Arbitrage dynamics and shifting trade flows.
Arbitrage flows will be pivotal in shaping diesel market dynamics in 2025. Closed USGC-to-Europe arbs have supported regional diesel prices, but this could shift as TC14 freight rates stabilise and Transatlantic flows resume.
However, large draws on US distillate inventories, as highlighted in this week’s EIA data, underscore the fragility of global diesel stocks heading into winter and maintenance season.
In Asia, strong demand continues to draw Middle Eastern diesel eastward, primarily to Singapore and Australia. While the East-West (E/W) spread has narrowed slightly, indicating reduced Asian tightness, rising Singapore diesel premia reflect persistent regional strength.
Chinese diesel exports, curtailed by lower refining activity, have propped up prices, though a supply boost is anticipated by mid-2025 as Chinese refiners should ramp up output. It must be noted, however, that a resurgence in Chinese refining activity remains far from certain.
Domestic demand for diesel continues to falter, declining year-on-year, while the broader economy grapples with the need for emergency stimulus measures.
Consequently, it is equally plausible that refining runs could hold steady into 2025, showing little year-on-year variation.
Europe remains under pressure, with rising NWE diesel premia driven by strong heating oil demand and reduced arrivals from East of Suez.
However, as global refinery runs rise and arbitrage routes reopen, Europe is expected to benefit from increased inflows, particularly from the USGC.
Meanwhile, Middle Eastern refineries are recovering from disruptions, including maintenance at Yanbu. Once these facilities return to full capacity, the region’s export capability will expand, reshaping trade flows globally.
Arbitrage routes will remain critical, with USGC and Middle Eastern flows expected to ease tightness by Q2 2025.
Medium-term market balance: Maintenance and beyond.
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While early 2025 is expected to experience tight supply conditions, the medium-term outlook leans bearish.
Global refinery runs will increase as facilities in Europe, the US, and Asia emerge from maintenance. Higher margins are driving recovery, incentivising refiners to maximise output and capitalise on favourable economic conditions.
A key development will be the recovery of Chinese diesel exports. A prolonged period of reduced shipments from China has tightened markets across Asia and beyond.
However, if Chinese refining activity picks up, exports would set to grow significantly by mid-2025 since internal demand appears to have peaked and should fall y-o-y, easing global supply pressures and dampening price momentum.
Refinery maintenance will dominate early 2025, with turnarounds across key regions keeping supplies temporarily constrained. By Q2, the return of these facilities will shift market dynamics, with an improved supply outlook likely to soften prices. This period will mark a turning point as the market transitions away from Q1 tightness.
Winter weather remains a critical variable. A colder-than-average season could exacerbate early-year tightness and sustain bullish sentiment, while milder conditions would accelerate the anticipated bearish pivot.
By Q2, increasing global refinery output, recovering Chinese exports, and reopening arbitrage routes should lead to more balanced markets, barring unexpected geopolitical or climatic disruptions.
2025 – What lies ahead for crude?
Commentary Summary:
– Balance forecasts are divergent while geopolitical risks are high.
– Most crude supply growth will be WoS, risks to supply are EoS. EFS may have to react.
– Governments feel emboldened to tackle Russian & Iranian energy, potentially as a result of 2024 pricing (a key one being much lower gasoline/diesel at the pump).
2024 ends with high geopolitical risk and with consensus about long balances in 2025 breaking.
The year is ending with the consensus from major agencies over long 2025 liquids balances starting to break down. The EIA’s STEO recently shifted their 2025 liquids to a draw despite continuing to bring back some OPEC+ barrels next year.
That is at odds with the IEA who still see 2025 still very long despite no OPEC+ hikes. Non-OPEC supply is also a point of difference here, with high volumetric growth expected from the IEA next year that at the very least seems to be at odds with some recent data e.g. Brazilian disappointments.
As usual, the “proof is in the pudding” and actual stock changes vs the prevailing consensus are where the interesting re-pricings happen.
For now, crude and oil product stocks globally still don’t look particularly high and total liquids, including SPR, have essentially trended flat in 2024. Individual indicators, e.g. the very conspicuous US commercial stocks data, are reasonably low.
Sanctions risk to supply is growing.
While the key ‘obvious’ issues to balances in 2025 consist of Non-OPEC supply growth, limited end-user demand growth prospects, and the question of Chinese stimulus, tail-end risks appear to be growing.
Uncertainty over these issues has kept OPEC+ decision making focussed on the wait-and-see approach, while crude has trade in a very narrow band particularly over H2.
Iran, Venezuela and US/G7 foreign policy are the main tail risks. How successfully can Iranian barrels be taken off the market, if that is indeed the goal?
In theory China could be convinced to turn away from Iranian barrels and into the legitimate crude market and may already be heading in that direction on uncertainty and possibly on tightening shipping sanctions.
In both the Iranian and Russian case, there has also been a notable shift in policy from the west in terms of sanctioning energy.
The outgoing US administration is taking more risks, granting long- range missiles and seemingly targeting volume over price by increasingly sanctioning specific ships.
Western governments may feel emboldened for various reasons, including Russian progress on the front line, anticipated negotiations once Trump comes into office, and with pump prices currently low relative to the last year (not least because huge $/bbl gasoil and gasoline cracks have corrected).
Governments may even have long IEA balances and OPEC spare capacity in mind when thinking about cranking up sanctions.
A further risk to flat price is Chinese stimulus. Crisis-era language from the Politburo meeting in early December can be read either bullish or bearish.
Disappointments have been consistent this year following prior stimulus efforts and we remain sceptical, however, it does appear that the level of stimulus about to hit the Chinese economy will take a substantial step up over 2024’s efforts.
500 KBD higher crude imports y-o-y would make a huge dent to crude balances; note though that if runs rise and internal demand is poor, product exports may have to rise.
More Non-OPEC supply growth expected ahead, largely WoS in the US, Canada, and Latin America. Alongside sanctions risk, the EFS may have to narrow on average.
Alongside what could be a poor year for European and US runs (not least because of substantial refinery capacity closures by year-end, but also because of the step change in margins that appeared over mid-24), plenty crude supply growth will be coming from West of Suez rather than East.
Does this mean the EFS needs to come under pressure, noting also that the same setup was likely true of 2024? The marker trades in its own right but evidently more WTI-quality crude out of the US and generally more barrels needing arbed East tends to speak for relative pressure on the Brent market. VLCC rates are also expected to remain weak.
Some supply growth will even be North Sea-located, or close to it.
Johan Castberg is the sizeable 220 KBD startup of 35 API, low sulphur crude, coming onstream in the Barents Sea. This is lighter than Johan Sverdrup and may also arb East.
All told however, any EFS trade will inevitably require an outlook on OPEC supply (and Chinese imports); the group is officially set to hike output still over the course of the year but may end up keeping supply steady.
Higher compliance and the taking of least some Iranian barrels off the market would tend to keep Dubai bid up and call for more Western grades heading East.
All told, risk to the EFS is for a substantial y-o-y narrowing. Some of these effects may already be visible in the December EFS trend with China seemingly buying more legitimate crude.
Naphtha market outlook for 2025
Commentary Summary:
– Cracks surged throughout 2024, recovering to levels closer to historical averages.
– Asian naphtha stocks in October hit their lowest levels in 8 years.
– East-West spreads recovered steadily in 2024, entering Q1 2025 trading around the historical average.
– Gas-nap spreads normalized during 2024, moving away from record highs seen since 2022.
– More petrochemical plant closures in Europe are expected for 2025, threatening western demand numbers.
We close a volatile 2024 in the naphtha market, where one trend has dominated since Q2: the rise in cracks.
During the first quarter of the year, values in both Europe and Asia traded near -$10/mt, but a strong and sustained upward trend has brought them closer to historical averages.
The annual highs reached in October are now behind us, but the recovery has solidified, and we will enter 2025 with a much stronger market compared to crude oil prices.
A bearish crude market, with Brent currently trading almost $20/bbl below the year’s highs, has been accompanied by two factors that have kept the naphtha market tight from a fundamental’s perspective, driving cracks upward for most of the year.
The first factor is historically low stocks in Asia during Q3, coinciding with numerous arbitrage opportunities to the East in the final months of the year, which have helped keep the global market tight.
From the Asian balance, the second half of the year has seen a significant reduction in the availability of Russian volumes destined for Asian outlets.
As a result, Asian demand has relied on increased imports from the West, contrasting with the first half of the year when margins remained closed for most of the period.
Another structural change observed throughout the year lies in the differentials with gasoline. Gas-nap spreads across various regions have returned to pre-crisis normality, though currently above historical averages.
The record highs we had grown accustomed to since the onset of the war in Ukraine are now behind us. A significant surge in octane and aromatics demand had heavily impacted the market, sustaining elevated levels throughout 2022, 2023, and the early months of 2024.
The market now seems to have found equilibrium well below the $100/mt thresholds we had come to expect. Our outlook for the coming year suggests that the peak levels of previous years are unlikely to be surpassed again.
However, recent market dynamics have shifted the paradigm with which we will start 2025. A weak December has left negative physical premiums in Europe and Asia following prolonged declines since November.
European destocking has impacted demand more heavily than in previous years, and low cash differentials have allowed arbitrage to Asia to remain widely open through the year’s end.
January deliveries in Europe and February deliveries in Asia have begun to stimulate a recovery in premiums and time spreads, a trend we expect to continue at the start of the year.
Finally, in the medium term, petrochemical demand dynamics will be key to shaping the market’s trajectory for the year. In Europe, we anticipate more announcements of plant closures as the industry continues to phase out less efficient facilities in the coming years.
In Asia, while we no longer expect double-digit demand growth rates, the region will continue to expand capacity with new steam cracker units that will require naphtha and LPG imports from the West to meet excess demand.
This trend suggests that higher East-West spreads will be the norm throughout the year, especially compared to the levels seen during the first half of 2024.
2025: What’s in store for gasoline markets?
Commentary Summary:
– Continued capacity ramp-ups in the West (Dangote/Dos Bocas) are likely to be outweighed by shutdowns in and around pricing centres
– Middle Eastern and Indian capacity additions should help offset some of the expected supply shortfall from weaker Chinese exports, but raises the first bearish risk if Chinese exports return
– 2024 has been a solid year for gasoline demand globally with consumer spending recovering and lower pump prices. Continued vehicle fleet switching in Europe will remain supportive, with demand growth still looking robust in the East of Suez (ex-China)
– Forward EBOB is looking particularly strong into 2025. A narrow paper TA arb, a forward E/W at record negative levels for a prior December, and a wide summer 2025 gas-nap are all pointing to expectations of a tight European gasoline market.
Whilst not quite hitting the record heights of 2022-23, 2024 has been a solid year for gasoline markets overall.
Talk at the beginning of the year of major Atlantic Basin disruption from capacity additions in Nigeria and Mexico proved overdone, with neither able yet to consistently displace traditional arbitrage barrels into those regions.
Instead, focus is now instead shifting to capacity closures that are set to tighten up the Atlantic Basin balance in 2025.
Indeed, despite gradual ramping up of supply from Dangote, it is currently EBOB which is pricing most strongly for 2025, with very low forward TA Arb and E/W levels.
Low forward TC2 and a wide forward gas-nap are helping to keep export opportunities open for ARA blenders into plenty of destinations East and West through Q1.
Options East start to run short once we reach the end of Q1, and Q2 RBOB arbs only just about work because of extremely weak TC2. This would bring us to the first trade to watch for 2025: Q2 TA Arb and TC2 look very low, with moves higher in likely to pull the other higher with it.
The final element of determining forward TA Arb is European gas-nap spreads, which are currently trading above seasonal average levels already when looking ahead to summer-25 and are helping to keep forward blend cost assumptions low for RBOB in ARA.
We will need to read my colleague’s 2025 naphtha outlook to know whether or not naphtha will finally start to close the gap on gasoline again, but for now it looks as though finished gasoline should remain supported in the Atlantic Basin and Russian naphtha supplies are likely to remain curtailed, so it seems a fair bet that these wider gas-nap spreads can help temper any upside to the TA Arb going forward.
Looking to the East, forward pricing (relative to EBOB) is at its weakest level for this time of year that we have seen in our history, which is quite a statement considering that the Sing92 swap is in backwardation all down the curve and the market in the East is still trying to assess the impact of reduced Chinese tax rebates on product exports which are expected to curb Chinese supply into the market.
A negative E/W in the kind of territory we see at the moment will almost certainly start to attract AG barrels into the West once we hit the summer months.
So here, again, all eyes on China to see where those swing AG barrels end up in the summer, and if they end up not being needed in the West, an improving E/W spread vs current forward levels will be needed to keep them pointing East.
Source: Spart Commodities
