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.
