Europe diesel oversupply expected to persist as demand remains weak

24 January 2013 16:52  [Source: ICIS news]

LONDON (ICIS)--The surplus building in the European ultra low sulphur diesel (ULSD) market is likely to persist as demand remains weak and supply abundant, sources said on Thursday.

A combination of imports from Russia, an open arbitrage from the US, robust local production and poor demand stemming from adverse weather conditions in northwest Europe deterring driving, have resulted in a growing oversupply.

This in turn has led to premiums over ICE gasoil falling significantly. Early on Thursday afternoon, ULSD cargo premiums to February ICE gasoil stood at $11-12/tonne (€8-9/tonne).

ICIS data shows that ULSD cargo premiums were last comparable on 14 December 2011, when the premium stood at $11/tonne to front month ICE gasoil.

These latest premiums also show a steep decline from those seen two to three months ago.

According to ICIS data, on 8 November 2012, the ULSD cargo premium to front month ICE gasoil stood at $61.75/tonne.

A diesel oversupply is extremely unusual, given that the European ULSD market is structurally short. Furthermore, there seems little likelihood of it easing in the near future.

“I don't see any signs of the market picking up,” a producer said on Thursday, when asked how long these conditions could persist. “On the contrary, there seems to be a steady inflow of material from the US as well [as Russia], which doesn't help.”

On the liklehood of ULSD cargo premiums falling further, the source said: “Not sure what to think anymore. There seems to be some sort of level around $11-12ish/tonne [premiums over February ICE gasoil] where the print is today, so not sure it will go below, but ... [it might].”

Although demand for diesel is expected to return when weather conditions improve and more people resume driving, sources say these increased requirements for the product will unlikely be sufficient to absorb the surplus.

A gasoil/ULSD barge broker agreed. “I see the same. There’s enough diesel here. Good imports, and also the production of refineries at high speed. End users have sufficient stocks still, and at a current flat price spread on the [ICE] gasoil, people are not there to buy in a huge extent.”

“I think we will see lower premiums all year,” the cargo producer said. “I think with the Russians upgrading their facilities, and the US arbs, and cargoes from the east, it will be a pretty dull picture in 2013.”

With diesel usually the most profitable refined product, this is bad news for Europe’s refiners.

The barge broker took a less pessimistic view, however: “Well, to say something like that [that premiums will be low all year] in one of the quickest changing markets is not something I would do.”

The source added that we are still only at the beginning of the year.

However, no relief is yet within sight.

With the spring refinery maintenance period expected to see fewer turnarounds than last year, unless there are run cuts, supplies will remain abundant.

While the gasoil market is also suffering, in an even more unusual turn of events, it is now looking comparatively strong compared with diesel.

The producer said: “I think we will see a downgrade from diesel into the gasoil pool now, as gasoil is comparatively stronger, so more gasoil for sure.”

($1 = €0.75)

By: Jo Pitches
+44 208 652 3214

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