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Fuel demand looks lighter with EVs in, diesel out

Diesel demand is falling in Europe as more vehicles use gasoline and electricity, with similar trends beginning to show in developing economies, albeit at a slower pace, writes Jeremy Bowden

While crude market watchers are busy trying to work out future total demand, there is a demand shift under way within the end-user market in Europe. In a trend that has been reflected to some extent in other developed countries and China, there has been a move away from heavy products towards the top of the barrel and gas.

The trend has been driven by cheap US shale gas and natural gas liquids (NGL), and a push from the recent diesel scandal and accelerating moves to reduce urban pollution. However, growth in diesel demand outside the OECD and China is likely to continue, and may still overwhelm the trend in developed markets.

European countries are already legislating to reverse the regime that saw the ratio of gasoline to diesel consumption move from 2:1 to 1:2.5 over the last 20 years. Favourable excise taxes are going, and urban restrictions are rising, with a complete ban on diesel vehicles in Paris, Madrid and Athens from 2025 onward; and ultra-low emissions zones (ULEZ) policies that will require nitrogen oxide and particulate emissions levels equivalent to those from gasoline vehicles in other areas. Legislation is also being aimed at car makers, with a ban on diesel engine manufacturing and sales in Germany from 2030 onward.

 

Electric shift

These developments are prompting car manufacturers to accelerate moves away from diesel and towards electric cars, with Mercedes-Benz the latest company to announce such plans. Its revised strategy, announced in April, calls for introducing more than 10 new EVs by 2022, instead of 2025.

European diesel demand is already beginning to fall back, with German diesel consumption in December at its lowest level since September 2010, accounting for 43% of total sales, according to Germany’s Centre for Automotive Research.

European demand growth for gasoil and diesel is forecast to slow down to 6.3 million bpd in 2017, which is a 0.6% year-on-year increase, according to the International Energy Agency (IEA). This contrasts with rapid consumer-driven acceleration in diesel demand in 2015 and 2016, when lower prices encouraged consumption. The annual growth rate in 2016 was 1.4%, slowing from 3.0% in 2015 – the highest growth rate in the last decade.

“Deliberate government efforts to bring down the previously preferential tax treatment of diesel versus gasoline, for example in France, and the Volkswagen emissions scandal may also have impacted diesel car sales,” the IEA said in its April Oil Market Report.

The annual sales growth of diesel cars in Europe has slowed from 10.0% in 2014 to 5.5% in 2015 and just 0.2% in 2016, which is likely to have an impact on the consumption of diesel in the upcoming years.

But even if demand falls back, another 1.6 million bpd of Europe’s ageing refining capacity will be mothballed by 2019. It is not anticipated that this decline will result in an end to diesel imports, which are forecast to double from 12% of European demand in 2016 to 25% in 2022. But importers could suffer if demand slides faster than forecast.

North America saw diesel demand decline in both 2015 and 2016, although this was partly because of warm weather and cheap gas. The latter factor has kept international prices down and encouraged natural gas adoption in both heavy transportation and marine bunkering, where it is likely to compete worldwide in the form of LNG with diesel for market share as regulation curtails the use of fuel oil. Gas penetration is being helped across the world by new small-scale LNG technology.

 

Developing nations

In the wake of the diesel emissions scandal, the sort of passenger fleet ‘dieselisation’ experienced in Europe is not expected to be replicated in other regions.

China’s passenger fleet, for example, remains dominated by gasoline, demand for which is expected to grow at 3.4% this year. However, the growth is not anticipated to continue, especially beyond 2019, owing to electric cars and higher fuel economy standards. From then middle distillates for freight transportation and petrochemicals are predicted to take over as the primary demand driver again, according to the IEA.

And in developing countries where mass transportation markets have yet to take off, demand is still largely being driven by middle distillates. Diesel consumption in the Philippines and Pakistan, for example, was up sharply in the first quarter of 2017, pulled higher by gains in industrial oil use and the freight transport sector.

Non-OECD Asian countries, excluding China, are forecast to account for 43% of total demand growth in 2017, so the rise of diesel here is likely to overwhelm the changes in Europe – leaving middle distillates the main demand driver worldwide.

However, even in developing countries, diesel demand may not be as high as anticipated. India has already begun to take steps to limit diesel vehicle adoption in big cities, prompting vehicle buyers to move away from diesel and toward gasoline vehicles nationwide amid fears that the legislation may be rolled out further.

Vehicle manufacturers have responded, shifting production to gasoline vehicles to meet demand. Since India deregulated diesel prices in October 2014, gasoline demand has grown sharply and analysts expect demand to show double-digit growth again in 2017. Policy announcements by both China and India this spring on extending the future role of electric vehicles could constrain transportation fuel markets further.

While there are expectations among some (including Shell) that global oil demand could peak within the next 5-10 years, the IEA anticipates only a gasoline peak. It cut its demand forecasts sharply between 2015 and 2016, but still forecasts overall oil demand will keep growing for several more decades because of higher consumption of diesel, fuel oil and jet fuel by the shipping, trucking, aviation and petrochemical industries.

Nevertheless, demand outlooks have become far less certain than in previous years, with any changes having major implications for refiners, shippers and retailers.

 

This commentary was sourced from NewsBase Intelligence’s European Oil & Gas Monitor (EurOil). To learn more, or to request a free trial, visit the NewsBase website. 

 

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