Distillate cracks slide as immediate supply concerns ease before sanctions

Quantum Commodity Intelligence - The rush to fill storage with relatively cheap Russian diesel before sanctions has alleviated immediate supply concerns in northwest Europe, which has seen cracks soften surprisingly fast in the past week.

Notional diesel refining margins (ULSD FOB barges) slid over $3.50/b Wednesday, assessed around $34/b over ICE Brent crude, down more than $10/b in the last ten days.

It is a similar pattern on cargoes (ULSD CIF NWE), which were assessed at a two-month low $35/b premium to ICE Brent crude on Wednesday, down nearly $15/b from 23 January.

It follows lower supply concerns in the final days before the 5 February deadline for EU sanctions on Russian product exports, evident in narrowing timespreads.

Backwardation on ICE gasoil M1-M2 futures has halved in the last ten days to around $13.75/mt Wednesday, with timespreads at the front of ULSD swaps curve down to $20/mt from nearly $40/mt on 23 January.

Gasoil/diesel held in the ARA region swelled to a 16-month high 2.2 million tonnes in the middle of January after building for several weeks.

Demand was also subdued at the turn of the year as a slowdown in economic activity weighed on diesel consumption, while a relatively warm winter removed much of the anticipated demand for oil-to-gas switching as a result of lower natural gas prices.

And imports increased from east of Suez as China stepped up export quotas in the autumn to capture outsized product cracks.

Stocks were able to subsequently rebuild nearly 50% from historic lows last summer when European suppliers realised it would have to replace over 1 million bpd of Russian diesel.

Russia accounted for over half of Europe's seaborne diesel imports before the Ukraine war, and Europe is still yet to wean itself off Russian supply. 

Europe was still the primary destination for Russian diesel last month, according to most accounts, which poses significant problems when stocks tighten again. 

So although prompt supply looks relatively plentiful for now, that could quickly change.

The reopening of China's economy after years of strict controls will tighten Asian supply again, and European suppliers will have to compete for swing barrels in the Middle East.

The gasoil EFS - which measures the premium between Singapore 10ppm gasoil swaps and ICE gasoil futures in Europe – has narrowed to around -$50/mt this week, from around -$70/b just seven days ago.