European diesel prices jump 8.5%, pass $1,000/mt on Russian export slump

Quantum Commodity Intelligence - Distillate futures in Europe soared 8.5% Wednesday amid fears the already-depleted Russian export program for ultra-low sulfur diesel from the Baltic port of Primorsk in March will be stranded, while at the same time refinery hydrotreating costs hit heights.

May low sulfur gasoil futures surged to $1045.25/mt ($140.3/b) by 1630 GMT from Tuesday, up the equivalent of $10.94/b compared to the $3.89/b rise in May Brent over the same time frame.  

The delayed release of the March diesel export schedule was down from February, with 1.477.5 million mt expected to load this month, which is 15% lower than the daily rate in February.

Russia accounts for roughly half of the imports of diesel and gasoil to Europe, which can vary between 4 and 6 million mt a month.

But sources were sceptical many of the Primorsk barrels would load.  

"Is anyone going to buy it is a good question and is anyone going to load it is the next question", said one source.

Another added: "Eventually it will flow, but few shipowners want to touch it right now, and buyers will be shying away from it for their own reputations."

The UK, which is heavily reliant on Russian diesel imports, has banned Russian-flagged vessels from its ports, as well as vessels that were owned and operated by firms with Russian interests.

But the opportunity to export diesel from Primorsk was still open.  

"Have you seen any restrictions of selling oil into the UK? There are none," one source said.

Swiss trading company Gunvor has the bulk of the March Primorsk program after winning the tender for the Surgutneftgaz exports this year.

Surgutneftgaz cancelled on Wednesday its tender for Urals crude in March after failing to find a buyer.

Meanwhile, natural gas prices soared higher in Europe, with April TTF futures trading at €173/MWh at 1630 GMT, up 42% from the same time Tuesday, to add to the cost of making diesel, pushing future prices to fresh heights.

The move fuelled hydrogen costs, and massively pushed up the cost of refinery hydrotreating, used to scrub sulfur from middle distillates to make roadworthy ultra-low sulfur diesel.

"I would estimate hydrotreating costs could be anywhere between $10 to $12/b at these levels," one analyst told Quantum.

Hydrotreating costs were pegged around $6/b when TTF natural gas prices were around €75/MWh. 

In 2019, the hydrotreating cost in Europe was only around $0.6/b on average.

The sharp rise in natural gas has fuelled refinery demand for light sweet crudes instead of medium or sour crudes.  

Primorsk ultra low sulfur diesel export table  (metric tons)