Diesel Shipments to Europe from U.S. and Mideast Hit Highest Level This YearBy and
Shipments set to rise to highest in at least six months
Time-spreads on diesel benchmark tighten on lower Russia flows
The U.S. and Middle East are set to boost supply of fuels such as diesel to Europe to the highest level in at least six months, helping to offset reduced flows from Russia and India.
Refiners in the U.S. Gulf Coast are shipping more to European ports as refinery runs have risen to seasonal highs and as growth in Latin America’s import needs starts to slow. Total imports of so-called clean products including diesel from the Americas and Middle East plus India and East Asia will rise to more than 1 million barrels a day in June for the first time this year, ship-tracking and fixture compiled by Bloomberg show.
The increase in deliveries to European ports coincides with signs that the region’s diesel market is tightening as the euro-area economy records its fastest expansion in six years. Tankers are returning to Hamburg for the first time since March as part of Germany suffers a shortage of supply. Time-spreads on Europe’s ICE gasoil futures that are among the region’s best indicators of supply and demand have strengthened markedly compared with where they were a year earlier, a signal of improving conditions.
“European economies are picking up,” Ehsan Ul-Haq, an analyst at KBC Advanced Technologies, said on Monday, also noting recent declines since March in inventories of middle distillates, referring to a category comprising diesel and jet fuel.
Inventories of diesel in Europe’s Amsterdam-Rotterdam-Antwerp hub have slumped since the start of May. The drop was partly because of a lack of Russian and U.S. inflows, according to JBC Energy GmbH. Russia was to cut supply from its Baltic Sea terminal at Primorsk this month after carrying out heavy maintenance on its diesel-making units in May. The drop in European inventory is in contrast to stockpiles in the U.S. and on the Gulf Coast which remain near seasonal highs.
“The structure is pretty strong,” said Olivier Jakob, managing director of Petromatrix GmbH, referring to ICE gasoil time-spreads which have narrowed from a year ago. The market flipped into backwardation on an intraday basis on Wednesday, signaling supply constraint. Since early 2015 it has mostly traded in the opposite structure known as contango, where near-term supply is priced below later-dated deliveries.
The north German city of Hamburg is to take three cargoes this month, receiving its first deliveries from the Middle East or the U.S. since March. Parts of East Germany have suffered shortages this month after a fire at Total SA’s Leuna refinery and supply is being brought into the area by barge from Hamburg, according to Riverlake Barging.
The Middle East accounts for nearly half of the supply from the four main regions tracked by Bloomberg at 1.9 million tons, its refiners having invested in capacity in recent years. Qatar and the United Arab Emirates boosted supply. Indian refineries cut deliveries to the lowest level this year as domestic demand is rising, with diesel demand in May growing at the fastest pace since November.
India, which also cut exports this year as it moves to tighter fuel standards, will deliver 270,000 tons to Europe this month, well below the 500,000 tons unloaded in January.
While diesel should benefit from better demand in Europe, the market remains at risk from rising supply, Energy Aspects said in a report sent on June 21.
“With Asia looking balanced for the moment, the main problem area for middle distillates is the Atlantic Basin, where the supply problem will persist as long as crude is weak enough to keep refining margins afloat,” the researcher said. “With Latin American import requirements stagnating, the U.S. Gulf Coast will need to find new outlets” and “surplus U.S. supply will be forced to Europe.”
— With assistance by Rachel Graham