FocusTightness, price backwardation hamper Europe mid-distillates

05 October 2012 16:31  [Source: ICIS news]

By Jo Pitches

LONDON (ICIS)--A lack of available material and a steep price backwardation are both negatively impacting the European gasoil and diesel markets, participants said on Friday.

Furthermore, this tightness is exerting upwards pressure on premiums, exacerbating the impact on demand.

“There’s a lack of available product, there’s a 2-3 day delay [when buying material],” said a trader in the German 50ppm gasoil/ultra low sulphur diesel (ULSD) barge market. “There’s the backwardation too. Interest [in the product] is still there, but … If prices dropped $80/tonne [€62/tonne], people would buy.”

On Thursday afternoon, there was a $13.50/tonne backwardation between October and November ICE gasoil. This is thought to be the widest ICE backwardation seen since late last year. Gasoil and diesel are both priced according to premiums or discounts to ICE gasoil.

Tight mid-distillate market conditions have arisen due to a combination of refinery maintenance in Europe and refinery outages in the US. During recent years, Europe has become increasingly dependent on diesel imported from the west.

Exacerbating the situation is that an ICE gasoil backwardation – albeit much softer than the current levels – has persisted for months, which has deterred buying for storage.

Despite this shortage of available volumes, some participants feel such a steep backwardation is not justified.

“The backwardation is stronger than it ought to be [given the physical state of the market],” a gasoil /ULSD cargo trader said on Friday. “Nobody wants to buy for storage.”

On Friday morning, the October-November backwardation for 0.1% gasoil cargoes stood at $12/tonne.

The diesel market appears to be suffering most as European demand is greater for ULSD than for 0.1% gasoil.

“Diesel [ULSD] has a steeper backwardation than normal gasoil, it’s tighter than 0.1% gasoil,” the cargo trader said.

The October-November backwardation for ULSD cargoes was at $18.50/tonne on Friday morning.

“It’s not all due to fundamentals,” the trader added. “Its newspaper activity, trading spreads … It [the steep backwardation] has to be temporary though, it can’t stay at $18/tonne.”

On Thursday afternoon, a 0.1 gasoil cargo was bid at a premium of $15/tonne to November ICE gasoil.

On the same afternoon, a ULSD cargo trade took place at October ICE gasoil plus $51/tonne.

($1 = €0.77)

By: Jo Pitches
+44 208 652 3214

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