Diesel's Europe-Asia Price Gap Rises to Most in 18 Months: Energy Markets

The biggest gap between Asian and European diesel prices in 18 months means an increase in shipments of the fuel to the U.K. from South Korea, shipping brokers say.

Vitol Group and Royal Dutch Shell Plc are among companies that have booked so-called Long Range 2 vessels to transport the fuel and four tankers were booked to load in October, twice as many as in September and up from one in August, according to shipbroker fixture lists.

Energy companies are taking advantage of the trade after gasoil, a proxy for diesel, became $20 a barrel cheaper in Singapore than in Europe, the widest price gap since March 4, 2009, according to data from broker PVM Oil Associates. That spread more than compensates for the $4.33 a barrel it costs to ship fuel from Asia to Europe, based on tanker charter rates.

“The arbitrage is open under the current market situation and if a trader can find a spot cargo he’ll bring it west,” said Akira Kamiyama, an energy derivatives trader with Mitsui & Co. in Tokyo.

Demand for diesel, used by factories and trucks, is increasing on expectations European growth will accelerate. German consumer sentiment will rise to a three-year high in October after Europe’s biggest economy expanded 2.2 percent in the second quarter and unemployment declined in August, the Nuremberg-based market research company GfK AG said yesterday. Consumers in the country are replenishing stockpiles of gasoil, or heating oil, ahead of the winter months.

“European diesel demand is strong relative to what was expected” in other regions, Lawrence Eagles, head of commodities research at JPMorgan Chase & Co., said by phone from New York on Sept. 24.

Maintenance Halts

Supplies in Europe haven’t kept pace because several refineries in the region shut for repairs before the Northern Hemisphere’s peak winter heating season. Shell shut a diesel unit at Pernis, Europe’s largest refinery, earlier this month for repairs, according to two people with knowledge of the work. The company started its Fredericia refinery in Denmark Sept. 18 after two weeks of planned maintenance.

Kuwait Petroleum Corp. has shut its 80,000 barrels a day Europoort refinery in Rotterdam for maintenance.

Gasoil stockpiles in independent storage fell for a third week in Europe’s Amsterdam-Rotterdam-Antwerp oil-trading hub, according to data from PJK International BV on Sept. 23. PJK’s weekly gasoil statistics include diesel as well as heating oil.

Arbitrage Exports

The combination of rising demand and falling supply has pushed the front-month gasoil contract on London’s ICE Futures Europe exchange into backwardation, where fuel for immediate delivery trades at a higher price than contracts for later months. Futures were last in an extended period of backwardation in March and early April.

European gasoil for October delivery has gained 9 percent since July 5 to trade at $679.75 a metric ton today on ICE. Traders are importing from Asia and the U.S., in particular the ultra-low-sulfur diesel grade that meets Europe’s transportation specifications. Diesel that fails to meet those standards will be blended into the heating oil pool.

“In terms of ICE gasoil, the current backwardation in near-dated maturities will be challenged by arbitraged U.S. and Asian supplies to Europe,” Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA, wrote in a report Sept. 24.

Tankers Booked

At least seven tankers were booked this month to ship 310,000 tons from the U.S. Gulf Coast to Europe, according to Clarkson Research Services Ltd., a unit of the world’s biggest shipbroker. That’s up from three vessels in August carrying 114,000 tons.

In Asia, Shell chartered the Atlantic Spirit to load diesel from South Korea on Oct. 9. Vitol booked the Avor and the Paramount Hatteras, both new tankers, to move supplies in the same direction, according to reports from shipbrokers Millennium Chartering Ltd., Interocean Shipping and Clarkson.

Chevron Corp. will load the Genmar Maniate with 90,000 tons of gasoil on Oct. 7 from South Korea, according to Millennium.

PJK International founder Pieter Kulsen said less gasoil is being put into storage. PJK figures show gasoil inventories in the Amsterdam-Rotterdam-Antwerp region dropped 2.5 percent to 2.47 million tons in the week through Sept. 23, compared with 1.985 million tons during the corresponding week in 2008 and the record 3.028 million tons reached on Sept. 10, 2009.

Floating Stocks

Backwardation may also lead traders to reduce supplies in floating storage as the profit from holding diesel diminishes, according to Tchilinguirian of BNP Paribas.

The amount of refined oil products held on ships in Northwest Europe has dropped to 7.619 million barrels, down 27 percent from 10.546 million on Sept. 21, according to data compiled by Bloomberg.

The backwardation in European gasoil narrowed to $1.75 a ton yesterday, from $2.25 on Sept. 24, comparing October and November futures prices on the ICE exchange. It widened back to $2.25 as of 3:03 p.m. London time.

Diesel’s premium to front-month ICE gasoil fell to $12 a ton yesterday from $24 on Sept. 8, according to data compiled by Bloomberg. The prices are for barges of up to 5,000 tons of diesel traded in the ARA-area.

“The recent shift in the ICE gasoil first month contract to slight backwardation is rather a puzzle in the context of the still-high ARA gasoil stocks,” Facts Global Energy, a consultant, said in a Sept. 22 report. “It’s difficult to see the apparent tightness in European gasoil persisting, especially when refinery downtime ends.”

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net

To contact the editor responsible for this story: Jane Lee in Kuala Lumpur at jalee@bloomberg.net

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