Distillate summary: Russia ban sends LSGO higher, cash diffs fall

22 Sep 2023

Quantum Commodity Intelligence - It was another turbulent week for diesel prices, which had started to ease in Europe on what was expected to be bumper imports from east of Suez amid a wide EFS, but Russia's announced export ban sent prices back to near nine-month highs.

October low sulfur gasoil futures closed at $1,007/mt on Thursday at 1630 London time, just $3/mt shy of the highest level since January following the announcement from Moscow of a temporary ban.

Prices had eased 1% in early trade on Friday as analysts rushed to predict what would be the likely length of a ban.

But frontline LSGO versus frontline Brent crude futures remains above $40/b, $1/mt higher than in August and at the same as the January average - just before the EU imposed a ban on Russian oil products.

After a dearth of offers in Platts physical trading window last week, indications to sell cargoes into Northwest Europe started to appear earlier in the week.

But following the ban news, few wanted to be short ULSD CIF NWE cargo swaps, leaving offers to disappear on Thursday.

Premiums of physical cargoes delivering in the next 10-25 days were pegged by Quantum at $18.75/mt over October LSGO, down a sharp $30.25/mt on Monday.

The volatility in the premiums indicates that the concerns seen in the futures market are more speculative and not replicated to the full extent in the physical market even despite news of a hiccup at Shell's Pernis refinery earlier in the week.

That dynamic of crashing premiums versus soaring LSGO futures was also seen in barges, which were trading at $20/mt on Monday, but fell to just $5/mt by Thursday, with Russia-owned trading house Litasco buying heavily on Monday.

However long the export ban will be, it will tighten Latin American markets, which took around 30% of Russian exports in August and will now likely seek to snap up cargoes from the US to fill the gap.

And markets in the US looked tighter week-on-week, with inventories falling almost 3 million barrels in the week to September 15 versus the expectation of a small rise from analysts.

They remain around 3% above the same point last year, but down 20% on pre-Covid levels.

In Europe, they were flat on the week but more than 15% down on five-year averages.

Asia

Firmer prices in Europe and increased China flows, helped keep the EFS wide, with Asia October swaps minus October LSGO stable at close to -$60/mt - levels not seen since the early days of the EU ban on Russia.

That will result in a greater number of cargoes flowing from the Middle East and Far East to Europe with Asia covered by increasing Chinese exports.

Figures released by Chinese Customs showed exports rose almost by a third to 300,000 bpd in August, that had helped to narrow backwardation in the market from $4/b to $3.70/b, but Thursday's news blew that back out again by Friday to $4/b.

Refining margins at $35/b remain very healthy and this will likely spur more exports given the crash in gasoline cracks and there was talk of additional volumes booked directly from China to Europe.

Analysts at FGE said in a report that the upcoming maintenance at Jamnagar with cut exports of diesel to fall – 40,000 bpd to 550,000 bpd in October and the same again to 410,000 bpd in November.

On the stocks front, Singapore middle distillate inventories fell 9% to 9 million barrels, in Japan diesel stocks were down 5% to a five-week low of 8.4 million barrels and in Fujairah distillate inventories rose 9% to 1.97 million barrels.

Jet

Cash cargo premiums over LSGO futures fell over the week as diesel firmed and at least four cargoes were heard traded into Rotterdam, Isle of Grain and Le Havre just hours after Russia's diesel ban.

Cargoes were pegged at $60/mt over LSGO, down $6/mt on the week, but cracks over Brent were up by more than $1.50/b to $42/b, $3/b shy of an eight-month high.

Asia prices broadly tracked Europe and the arb remains wide given that European jet is tight due to the maintenance season and the preference to make diesel while Asia is being held back by healthy Chinese exports.

That being said, with Reliance's Jamnagar's huge refinery expected to be partially shut for seven-weeks there is likely to be lower exports from India.

Exports last month from China rose 21,000 bpd on the month to 395,000 bpd – the second highest monthly level since Covid began.