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Diesel swaps' upward momentum halted as ICE gasoil futures spread moves

https://www.chemnet.com   Apr 24,2015 Platts
The upward trend for European ultra low sulphur diesel swaps seen in recent weeks has lost momentum as traders said they expect more resupply into the European market in May, and with a shifting ICE gasoil structure.

The Platts May 10ppm CIF NWE cargo swaps differential against the prompt ICE low sulfur gasoil futures contract moved from plus $3.50/mt on April 1 to a peak of $5.75/mt on April 16 and stabilized in recent trading sessions.

The Platts May 10ppm CIF cargo swaps differentials in the Mediterranean also saw the same move, rising from $5/mt on April 1 to $7.75/mt Monday, to see a recent fall to $6.75/mt Tuesday.

In tandem with falling swap differentials seen across European diesel markets, the structure between the first- and second-month low sulfur gasoil futures -- which underpins outright distillate prices in Europe -- has progressively moved to a steeper contango over the past week, moving from around plus 50 cents/mt at the beginning of April to $1.50/mt during Wednesday trading, ICE data showed.
"Prompt is cheaper/better supplied than the back of the curve...so already relatively well supplied, hence the contango and then more resupply, the contango gets steeper," a trader said.

Another trader said: "That is the reason why the back end of the [swaps] curve never moved -- Q3 and Q4 strips for the 10ppm diesel CIF NWE cargoes swaps and 10ppm CIF Med cargo swaps have been traded at lower levels. The activity is on the front-months swaps."

More volumes are expected to come from the US. According to analysts the arbitrage from the US remains fully open into the Mediterranean and Northwest Europe as weaker freight made the route economical.

"The US arb continued to stay open as the market in the States is buoyant with production creeping up and more production will just mean a flood into Europe," an analyst said.

"Currently there are an expected 1.5 million-1.7 million mt arriving in April from the US and it seems as though it is enough, we should start to see the regular 2 million-2.5 million mt heading deeper into Spring and the spread should experience more weakness."

Traders still seen some flow coming from the Baltic and the Middle East.

"You still have the Russian flow, some cargoes from India and occasionally other Arabian Gulf areas if they hit EN590 [European specification], then the local barrels, so there shouldn't be under-supply," a third trader said.

According to the Energy Aspects April Outlook for Middle Distillates, more supply is anticipated to come from the Middle East as new refinery capacity and modernization will increase diesel output.

"New supply is on the way. Refinery upgrades in the Philippines, Turkey and Bulgaria are due to enter commercial production this quarter, while the end of Ramadan in July should permit export refineries in Saudi Arabia and the UAE to direct more diesel into the Mediterranean," the report said.
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