European Gasoil Margins Shrink as Refiners Boost Production

European gasoil margins narrowed 17 percent in the last week as refiners in the region boosted output to the highest level in a year and Russian exports of the fuel climbed to the most in at least four months.

The front month August gasoil crack, or premium to Brent crude, shrunk to as little as $11.31 a barrel on London’s ICE Futures Europe exchange, from $11.61 yesterday. That’s down 17 percent from this year’s high of $13.57 on June 22.

“European runs have surpassed the 80 percent level for the first time in about a year in recent weeks,” David Wech, head of research at JBC Energy GMBH said in a report today.

That’s up from 75.5 percent in April, the lowest rate since November, according the International Energy Agency’s Monthly Oil Report on June 10, when European refiners such as Total SA and Neste OYJ processed 11.92 million barrels a day of crude. It was last above 80 percent in April 2009, IEA data show.

The drop in distillate cracks, a category of fuels that include heating oil and diesel, indicate that either the economic recovery is not that healthy or that refiners have raised runs too much, or both, Wech said.

“Further upside for gasoil crack is limited,” analysts at Societe Generale led by Michael Wittner said in a report on June 28. “Gasoil inventories in the U.S. and Europe remain near five-year highs and refinery runs in the U.S. and Europe have been increasing seasonally.”

July ICE gasoil futures traded close to a three-week low at $630.25 a metric ton, down 2.25 percent from yesterday and down 9 percent in the last nine days.

Discount Widens

The July-August gasoil contango, or discount of July delivery cargoes to August, widened for a second day to $2.50 a ton from $2.25 yesterday, implying increased supplies. The July-December contango advanced to as much as $19 a ton, the biggest gap in two weeks.

European imports of distillates are also likely to increase as Russian refiners boost exports and U.S. Gulf Coast stockpiles of the fuel reach a record high.

Russian exports of low-sulfur diesel from the port of Primorsk on the Baltic Sea will rise 24 percent in July, the highest in at least four months.

Exports will increase 121,000 tons to 635,000 tons in July from 514,000 tons this month and 520,000 tons in May, according to two people with knowledge of the loading schedules.

July diesel cargo swaps in Northwest Europe narrowed to a premium $15.37 to ICE gasoil futures yesterday, the lowest level in seven months.

“European margins are falling because there’s more supply,” Christophe Barret, Credit Agricole CIB oil analyst said by phone from London today. “There is also the anticipation that demand will remain relatively weak.”

Distillate stockpiles in the U.S. Gulf Coast rose for a fifth week to 51.81 million barrels, the U.S. Department of Energy said yesterday. Total U.S. distillate inventories rose 1.57 percent or 2.46 million barrels, higher than the forecast million-barrel increase.