Brent to face pressure from weakening European diesel: Goldman

[LONDON] A weaker European diesel market, where strong demand will be trumped by abundant supply from outside the region, will hit refining margins and the price of Brent crude, Goldman Sachs said in a report.

Following a stellar 7.2 per cent annual growth in demand for diesel in Europe in the first quarter of 2015, the investment back said it expected demand to grow by 220,000 barrels per day (bpd), or 3.5 per cent, for the rest of 2015.

The first quarter growth stemmed mostly from cold weather as well as low retail prices and favourable macro factors.

It set full-year growth at 270,000 bpd, achieved only five times in the last 30 years, according to the U.S. bank, which also forecast 2016 demand to grow by 0.4 per cent.

The growth is however expected to be heavily offset by 280,000 bpd growth in regional production and increased imports from Russia and recently-built mega refineries in the Middle East and Asia.

"As a result, we see inventories in Europe building from April by 30 million barrels to a peak in August," the bank said in its report entitled

"European diesel needs to cool its engines." The pressure on diesel refining margins will translate into lower processing rates and weaker demand for crude, it said.

"Our analysis leads us to conclude that European diesel will be a key source of pressure on refining margins. A sufficient squeeze on margins would result in economic run cuts by refineries, translating into a rejection of crude and, hence, a deepening in Brent contango."

Goldman's current price forecast for Brent futures is for an average price of US$58 per barrel this year and US$62 a barrel in 2016, one of the lowest among the world's leading banks.

Brent crude prices were at US$63.77 per barrel at 1130 GMT on Thursday, down 3 cents from their last settlement.

REUTERS