Diesel Flow to Cap Winter Price Surge in Europe

Diesel producers from India to the U.S. are boosting shipments to Europe to take advantage of the region’s lowest winter stockpiles in at least six years, capping gains in prices for the continent’s most-used auto fuel.

India exported the most in nine years during August, according to government data, while U.S. vessel charters rose to the highest in at least a year last quarter. First-half Russian sales to Europe have jumped 33 percent this year, data from the International Energy Agency show. The imports will prevent any repetition of shortages that caused prices to jump in the past two winters, even as Europe’s refiners cut output, according to all but one of nine executives surveyed by Bloomberg.

The increased shipments show how Europe’s waning refining operations are leaving it more dependent on companies such as India’s Reliance Industries Ltd. and Valero Energy Corp. of the U.S. for a fuel that powers 55 percent of the region’s vehicles. Curbed prices also stand to hurt profit at refiners from Saras SpA of Italy to Spain’s Repsol SA, while helping consumers.

“Europe will be able to draw quite heavily on higher volumes of diesel from the Asia-Pacific in the coming months,” Sabine Schels, a commodity strategist at Bank of America Corp. in London, said by phone Oct. 4. “With fewer diesel barrels demanded at home, a lot of these Asian countries, including India, have already boosted exports.”

Winter Peaks

The premium paid for diesel barges over the ICE Futures Europe gasoil contract soared during the past two winter seasons, climbing as high as $64 a metric ton more than the benchmark in October 2011 and November last year, according to data compiled by Bloomberg. It was about $24 today, equating to an outright price of $949.25 a ton, the data show.

Profit from converting crude into diesel, as approximated by the “crack spread” between gasoil and Brent crude, will stay near current levels this winter, or about 30 percent below the previous season’s peak, five of the refining executives in the Bloomberg survey said. The Sept. 19 poll included plant managers and vice presidents of companies from Italy to Poland. The crack spread averaged about $15 a barrel during the past month, compared with $20 one year ago. It was at $15.07 a barrel based on today’s settlement prices, according to data compiled by Bloomberg.

With Europe now exiting its recession, there’s hope for the region’s refiners that fuel use will pick up, said Seth Kleinman, head of energy strategy at Citigroup Inc. in New York.

“The European economy appears to be going through a recovery, which should result in some stronger consumption demand,” he said Sept. 19.

A jump in European demand may entice local refiners to boost output, limiting imports from the U.S., Vienna-based researcher JBC Energy GmbH said in an Oct. 7 note.

Low Inventories

Inventories of gasoil, including heating oil and diesel, in independent storage in Europe’s oil trading hub of Amsterdam-Rotterdam-Antwerp dropped to 2.01 million tons for the week to Oct. 3, the lowest for this time of year since at least 2007, according to PJK International BV, a Netherlands-based researcher.

The winter diesel market in Europe “could be quite good” as an export destination based on current stockpiles, Reliance Chief Executive Officer Tony Fountain said at a conference in London on Oct. 2. Mumbai-based Reliance operates the world’s largest refining complex.

Refiners in the region probably won’t boost processing following seasonal maintenance because ample diesel imports are set to cap their profit margins, Gemma Parker, an analyst at Facts Global Energy in London, said by phone Sept. 27. Europe is idling as much as 1.2 million barrels a day, or 8 percent of its refining capacity, for maintenance in September and October, according to the Paris-based IEA.

Indian Influx

Exports from India climbed in August to the most in 10 months, also the highest level for this time of the year since at least 2004, according to data from the country’s Ministry of Petroleum and Natural Gas.

Domestic consumption was lower than expected in India, as the currency in the world’s second most-populous nation lost almost one-third of its value against the dollar in the four months through the end of August, while its refining output continued to grow, according to the IEA.

U.S. refiners currently have about a $2-a-barrel advantage over their European counterparts as surging crude production provides them with cheaper feedstock, Torbjorn Tornqvist, chief executive officer of Gunvor Group Ltd., said Oct. 1 in a speech at the Oil & Money conference in London.

Plant Closures

“I expect the next two years we will see probably five, six plants being closed” in Europe, accounting for about 500,000 to 700,000 barrels a day of refining capacity, he said. Gunvor, an oil-trading company with offices in Cyprus and Geneva, bought refineries in Belgium and Germany last year from Petroplus Holdings AG, Europe’s largest independent refiner before it became insolvent.

MOL Hungarian Oil & Gas Plc’s Mantova refinery in Italy last week became the latest European facility to close, citing the “unfavorable economic environment that the refining business faces in Italy.” It joined 15 sites in the region to have shut since 2008, according to the IEA.

Chartering of ships to haul diesel from the U.S. to Europe climbed in the third quarter to the most since Bloomberg began compiling the data last year, as refiners increase production amid North America’s oil shale boom. Europe imports about 16 percent of the diesel it uses, IEA data show.

Russia, which supplied a third of Europe’s imported diesel in 2012, according to the IEA, has also entered seasonal maintenance, taking offline 21 percent of its refining capacity in the week ended Oct. 2, according to the country’s Energy Ministry. When the overhauls end in November, Russian flows of the fuel will rebound, according to the survey of refining executives.

Russian Diesel

Russia, the world’s largest oil producer, has doubled exports of high-quality diesel to Europe this year to about 650,000 barrels a day, Facts Global’s Parker said. OAO Rosneft, the world’s largest publicly traded oil producer by volume, is spending $25 billion on refinery upgrades.

Diesel crack spreads below $15 a barrel were “extremely disappointing for refineries that have all maximized diesel production,” Dario Scaffardi, Saras’s executive vice president and general manager, said on an Aug. 9 conference call.

Repsol spokesman Kristian Rix declined to comment on how diesel supply affects the Spanish company and Massimo Vacca, head of investor relations at Saras, didn’t return a phone call and e-mail yesterday seeking comment.

Mild Weather

Milder-than-usual weather is forecast for the early part of the European winter, potentially damping demand for heating fuels, according to MDA, a Gaithersburg, Maryland-based meteorologist.

“An early look at winter 2013-2014 shows a mild temperature pattern being driven by warmer waters in the Atlantic Ocean,” Bradley Harvey, an operational meteorologist at MDA said Sept. 27 by e-mail. The second half of the winter may yet be colder-than-normal as cold air is attracted from Siberia, he said.

“Everything looked like things were going to be tight in Europe this winter with production limited and stocks low,” Jonathan Leitch, a London-based senior analyst at Wood Mackenzie, said Sept. 27 by phone. “But now I don’t think there’s going to be a pinch or shortage with the wave of cargoes from the U.S. and Asia offsetting that.”

Before it's here, it's on the Bloomberg Terminal.