(Bloomberg) — If the oil market provides insights into the state of the economy, it does so through the perspective of two key petroleum products: diesel and naphtha. In Europe, the situation is currently bleak.
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Diesel powers trucks, trains, ships, and industries such as farming and construction. On the other hand, naphtha is a crucial ingredient for the petrochemical sector, used in the production of various items including medical equipment and chewing gum. This year, OECD Europe is projected to experience a significant decline in the consumption of both diesel and naphtha, with naphtha reaching its lowest consumption levels since 1975.
Alan Gelder, Vice President of Refining, Chemicals, and Oil Markets at consultancy firm Wood Mackenzie Ltd., explained, “Europe’s weak economic growth has greatly impacted the manufacturing sector, resulting in reduced demand for naphtha as a petrochemical feedstock and diesel for the manufacturing and movement of goods.”
Even in a world where attention is focused on potential supply disruptions due to conflicts in the Middle East, Europe’s demand remains critically important. This year, the expected drop in consumption for both fuel types amounts to over half a million barrels per day compared to pre-pandemic levels, almost equivalent to the oil usage of Belgium.
Europe’s usage decline has a ripple effect on economies and oil markets worldwide since it is not only a major importer of diesel-type fuel but also a regular exporter of naphtha to East Asia and Latin America.
A part of this year’s decline in demand can be attributed to long-term structural trends. Buyers in the European Union have been favoring gasoline-powered vehicles over diesel, while electric car sales have further affected diesel consumption.
However, Europe’s economic stagnation also plays a significant role. Purchasing managers’ index data indicates ongoing contractions in the euro zone’s construction and manufacturing sectors, accompanied by inflation exceeding target levels. Germany, the European Union’s largest economy, experienced a contraction in the last quarter and is at risk of entering a recession.
Naphtha consumption figures highlight the severity of the situation, with an estimated decline of over a quarter this year compared to 2021, amounting to 844,000 barrels per day. This represents the lowest consumption levels in 48 years, according to Ciaran Healy, an oil market analyst at the International Energy Agency. While naphtha is also used in gasoline blending, the consumption measurement by the IEA does not include this aspect, focusing mainly on its use as a petrochemical feedstock.
Data from Argus Media Ltd. shows a significant drop in run rates at petrochemical steam crackers, which are responsible for converting naphtha and other feedstock into the basic chemical building blocks of the industry. Moreover, producer OMV AG recently revised down its forecast for European steam cracker utilization.
BASF SE, a major petrochemical company, cited lower demand in European chemical production due to high inflation, increased interest rates, and a rise in natural gas prices.
Diesel demand in the top five European economies—Germany, France, the UK, Italy, and Spain—is experiencing contraction. In September, French road diesel sales fell by 13.4% compared to the previous year. Germany, in particular, is expected to witness a drop in overall oil demand by approximately 90,000 barrels per day this year, surpassing other countries except for Pakistan.
See also: German Oil Demand Drops as Europe’s Industrial Powerhouse Stalls
According to the IEA, OECD Europe’s demand for diesel-like fuel is predicted to decrease by about 380,000 barrels per day this year compared to pre-pandemic levels in 2019.
A more varied picture emerges globally. China exhibits booming demand, with diesel-type fuel increasing by 40% from January to August this year compared to the same period in 2019, according to JODI data. Naphtha consumption in China has more than doubled during this time frame. The country has made significant investments in petrochemical capacity, resulting in oversupply, especially in products like ethylene, propylene, and aromatics. This overproduction has enhanced China’s competitiveness as a manufacturing hub.
“China has established highly efficient supply chains after expanding its petrochemicals industry, making its finished products extremely competitive compared to other countries,” said Amber Liu, Asia head of petrochemical analytics for ICIS.
In the US, implied demand for distillates, which include diesel and heating oil, has fallen below seasonal norms in recent weeks. However, government forecasts predict that distillates demand will remain below year-ago levels in the fourth quarter before picking up early next year. JPMorgan analysts note signs of a budding recovery in the trucking industry, with an increase in rail freight as well.
In the US, naphtha is typically used to produce gasoline, while petrochemicals increasingly prefer cheaper natural gas liquids, a byproduct of shale oil drilling, as their feedstock.
Despite these global variations, Gelder stated, “the outlook for 2024 remains weak for both products in Europe.”
–With assistance from Rachel Graham.
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