Switch to gasoil futures contango leads to stronger differentials

15 November 2013 17:51 Source:ICIS News

LONDON (ICIS)--The switch from backwardation to contango in the ICE gasoil futures market has contributed to stronger differentials in the physical gasoil and diesel markets, sources said this week.

Earlier in the week, November ICE gasoil was backwardated to December by as much as $8.50/tonne. Yet when November expired on Wednesday and December was established as the front month, this spread switched to a $1.50/tonne contango.

A backwardation - where future prices are traded lower than the current month’s price - discourages buyers from purchasing product with the aim of selling at a profit in the future.

Indeed, sources said players with material in tank had been under pressure to sell, so as not to incur loss of value on their inventories.

Yet the switch to the slight contango removed that pressure to sell.

“[A contango of] $1.50/tonne is just about break-even [for storing material]. With minus $8/tonne there is strong pressure to sell,” said a trader.

This week, diesel barges traded at a premium over December ICE gasoil of $15-16/tonne FOB (free on board), compared with $9-11/tonne over November ICE gasoil last week.

In the 0.1% sulphur gasoil barge market, differentials increased from November ICE minus $1/tonne to December ICE plus $1/tonne.

($1 = €0.74)

By Ross Yeo