European diesel price dip puts Asia arb at narrowest since invasion
Quantum Commodity Intelligence - Tuesday's slump in European diesel prices after the market discounted the risk of a Russian oil ban has narrowed the spread between the price in Singapore and Europe to the lowest since Russia's invasion of Ukraine in Febraury.
The spread between April swaps for 10ppm cargoes loading in Singapore versus low sulfur gasoil futures for this month has narrowed to $37/mt compared with $150/mt two weeks ago, making it less profitable to ship in the fuel from west of Suez to the Mediterranean and Northwest Europe.
Low sulfur gasoil futures for April were marked at $1,089/mt by 1630 Singapore time compared with swaps for the same month at $141.20/b ($1,052/mt), the narrowest spread since the end of February.
For Q2, the spread is -$52/mt, the narrowest point since early March.
European diesel prices fell sharply on Tuesday after the market reversed expectation that the EU would soon ban Russian oil, with April LSGO falling from $1,138.50/mt on Monday at the physical market 1630 London time close to $1,077.50/mt.
The backwardation also crunched in from $67/mt to $44.25/mt with the premium over Brent falling $7.35/b from $46.48/b to $39.13/b as some of the risk premium was taken out of the market.
Cracks, however, remain at elevated levels.
The move comes as Europe remains reliant on Russian diesel while Asia is undergoing its own market tightness.
Structural short
Europe is structurally short diesel, needing to import 1 million bpd (4 million mt per month) and Russia accounts for about 60% of that supply.
While many majors have stated they will not buy Russian oil, some, as well as trading houses, retain term contracts to take diesel.
Indeed, loadings from Primorsk this month are expected to be higher than last despite the self-sanctioning of majors and the UK plans to phase out buying Russian oil by the end of the year.
The UK continues to buy Russian diesel, providing it is flagged by a different country, with trading houses such as Glencore affiliates chartering vessels to deliver the fuel up the Thames this weekend.
Meanwhile, in Asia, Indian demand for gasoil and diesel remains solid, while there is uncertainty about future supply from China and rising demand in Australia, which is cutting its own crude processing capacity.
Premiums of cargoes over swaps in Singapore have been close to $8/b for days now, a record premium that shows how tight physical supplies are in the bunkering hub.
Global stocks of diesel remain at historic lows, which is adding further upward pressure to diesel prices.
In Asia, diesel is trading at around $25/mt below where gasoline is compared with the $100/mt discount before the war started, although in barrel terms diesel is at a premium to gasoline.
