The winter period in the northern hemisphere is traditionally the time of the year when the middle of the barrel receives timely support as demand for heating understandably rises. Such seasonal pattern is manifested in refiners prioritizing distillate production at the expense of other products, which, depending on temperature and underlying physical demand, might or might not lead to depletion in inventories. While it is not set in stone, the margins offered by refining distillate usually increase during the first quarter of the year. In January, CME Group Heating Oil/WTI crack spreads gained $5.50/bbl in value.

The support for distillates can withdraw as the cold weather abates. This year, however, might be different. The Russian-Ukrainian conflict has been seen as supportive for gasoil and heating oil given that Russia used to be a significant exporter of the product, chiefly to Europe. The impact of the Ukrainian war has been aggravated since the beginning of October, when tension in the Middle East flared up, and shipping through the Suez Canal has become a perilous and burdensome activity. The most affected products are middle distillates. On top of scarce Russian availability, India’s gasoil export to Europe fell to its lowest level in January, a decline of nearly 80% from the previous month.

Falling supply from Russia and east of the Suez inevitably leads to increasing reliance on U.S.-refined distillates. This trend is neatly displayed in the chart above, which shows a 40% rise in U.S. distillate exports between the middle of October and the end of January, during which period gasoline exports retreated 5%, EIA data suggests. As comforting as it sounds, the U.S.’s ability to be the last resort of distillate supply to Europe could soon be in jeopardy as the refinery maintenance season in the USGC is fast approaching. Estimates put the capacity that would come offline to around 1 mbpd. It is worth noting that the Weekly Petroleum Status Report for the week ending Jan. 26 recorded a fall of 8.7% nationwide and 13.6% in Gulf Coast run rates. A tighter than usual distillate market for the remainder of Q1 2024, on both sides of the Atlantic, is a very real and present danger, which is expected to be reflected in resolute crack spread values, unless the implausible truce between the Middle East warring parties takes place.