Rising European Heating Fuel Demand Draws South Korean, Japanese Supplies
Rising heating oil demand in Europe amid seasonal refinery maintenance has attracted supplies from as far as Japan and South Korea and pushed the benchmark London futures market into so-called backwardation.
Vitol Group, the world’s largest independent oil trader, hired one of four tankers to ship 90,000 metric tons of heating oil from South Korea to Europe, according to a Sept. 17 report from Interocean Shipping, a New Delhi-based ship broker. Consumers in Germany, the region’s biggest market for the fuel, bought twice as much of the fuel in August as the same month a year ago. A total of 485,000 tons were provisionally booked for shipment from East Asia, shipping reports show this week.
The front-month contract is “probably being propped up by refinery maintenance and restocking by end-users,” said Harry Tchilinguirian, London-based head of commodity-markets strategy at BNP Paribas SA. “There appears to be a lot of gasoil moving from Asia to Europe as a consequence.”
Gasoil futures for October delivery traded at a premium of $1 a ton to the November contract today. It was at a discount of $3.25 at the start of this month. The front-month contract traded at $670 a ton on the ICE Futures Europe exchange in London as of 4:28 p.m. local time. Gasoil is the European equivalent of heating oil in the U.S.
Gasoil futures were last in an extended backwardation in March and early April. A market is in backwardation when fuel for nearby delivery trades at a higher price than contracts for shipment in later months. This tends to happen when demand increases and inventories fall.
‘Unusual Arbitrages’
“The tightness in the spot market is creating unusual arbitrages,” he said. “I imagine some people might start moving diesel from the U.S. Gulf Coast to the Mediterranean.”
Refiners often carry out repairs in the northern hemisphere autumn before demand for heating oil peaks. Royal Dutch Shell Plc shut a diesel unit at Pernis, Europe’s largest refinery, last week for repairs, according to two people with knowledge of the work.
European refiners including ConocoPhillips have reduced the amount of crude processed this year, helping to bring down inventories, according to Deutsche Bank.
Chinese refinery runs are up 17 percent this year, according to Deutsche Bank. “This imbalance in Asian gasoil fundamentals is reflected in the steady rise of gasoil from Asia to Europe,” Deutsche Bank analyst Soozhana Choi wrote in a Sept. 17 note.
Chinese Refining Capacity
Chinese refiners are poised to increase capacity to 10.1 million barrels a day by 2012 from 8.6 million last year, according to data from BP Plc and forecasts by Standard Chartered. China’s refining expansion exceeded demand by 1.6 million barrels last year, the bank said.
European refiners are forecast to cut the amount of crude processed by 4.8 percent in the three months to December, compared with the previous three months, according to the International Energy Agency.
Gasoil cargoes arrived in northwest Europe last week from South Korea and India, according to PJK International BV, an Oosterhout, Netherlands-based consulting company. “You could expect more cargoes to come in,” Pieter Kulsen, PJK’s founder, said by phone today.
German gasoil or heating fuel sales were up in each of the past four months compared with the same month a year earlier, according to Mineraloelwirtschaftsverband, the country’s petroleum association. August sales were 1.76 million tons compared with 819,000 tons a year ago.
“The gasoil market is getting better and will continue to pick up,” said Uwe Babilon, manager of Weko Petrol GmbH, a fuel wholesaler that imports gasoil from Rotterdam by barge on the Rhine River. “Consumer tanks are still less full than normal.”
This week, Shell booked the tankers Moskovsky Prospect and Atlantic Spirit to load 80,000 tons each from South Korea and Japan. Vitol chartered three Long Range 2 tankers the Avor, Absheron and Paramount Hatteras while Mabanaft BV leased the Nansen Spirit, according to the shipping report.
To contact the reporter on this story: Rachel Graham in London rgraham13@bloomberg.net
To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net
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