Rising diesel exports to Europe

Oil traders are ramping up diesel exports from Asia and the Middle East to Europe in October to profit from a wide price gap between the regions as weeks-long strikes at French refineries have tightened stocks, although a steep backwardation may cap volumes, according to trade sources and shipping data.

The price spread between front-month Singapore 10 ppm sulphur gasoil swaps and the ICE low sulphur gasoil futures contract, also known as exchange of futures for swaps (EFS) , was close to minus US$150 a ton on Wednesday, versus minus US$29 a year ago, data on Refinitiv Eikon showed, making it attractive for traders to send oil to Europe.

"East of Suez is sending everything they can ship... it's just a question of how much China exports in November," a Europe-based trader said.

For October, around 289,000 tons of gasoil will be loaded from South Korea and China to northwest Europe, up from 137,500 tons in September, ship tracking data from Refinitiv showed.

Exports from India and the Middle East for October to northwest Europe were at around 480,000 tons and 834,000 tons respectively, as compared to 361,000 tons and 511,310 tons a month ago, the data showed.

The trader estimated that Europe may import about 3 million tons (750,000-850,000 barrels per day) from east of Suez in November, of which the Middle East could account for two-third of the volume. Traders expect the bulk of supplies to Europe to come from India and the Middle East, on shorter shipping times.

Asia's top fuel exporters in South Korea and Taiwan have issued a flurry of spot tenders this month, while China will also step up diesel exports after Beijing increased allocation.

However, outages at TotalEnergies' refineries in France caused by worker strikes since September have led prompt diesel prices to surge versus those in future months, a market structure known as backwardation, posing risks to the value of oil cargoes that travel over long distance such as from Asia to Europe.

Steep backwardation, which is already deterring traders from storing diesel globally, may prevent the much-needed heating fuel from reaching Europe this winter as the region is scaling back on imports from top supplier Russia ahead of a European Union embargo in February.

"Some end consumers were stockpiling Russian diesel but now with French strikes, the market has tightened up and we have brutal backwardation," a Europe-based trader said.

"So there is a big commercial incentive to draw stocks, which will make it worse to buy diesel."

Northwest European diesel barge profit margins rose to over US$83 a barrel on Tuesday, a record high, amid supply tightness.

Already soaring diesel prices in the United States have led traders to divert several cargoes heading from the Middle East to Europe to the New York harbour area, further constraining supplies in Europe.

"European gasoil cracks could come down even further up to US$15 a barrel once the strikes end, making it risky for Asian barrels to head over here even on a prompt loading basis given the strong backwardation, although the arbitrage is technically open on paper," said Mark Williams, a research director at Wood Mackenzie.