Heating oil boilers one of last remaining outlets in Europe for ULSD

London — With lockdowns across Europe weighing heavily on consumption of ultra low sulfur diesel as road fuel, more and more material has started ending up in the heating oil pool instead of being sold at the pump, market sources said.

"We have a lot of demand for [French heating oil] but because we struggle to fulfill it, we are downgrading 10 ppm diesel into 1000 ppm diesel," a trader said.

"Sales of road fuels at supermarkets' petrol stations are slumping by 60%-70%...it is not going to rebound any time soon so stocks are building," he said, adding the oversupply of diesel was being sold as heating oil in France.

According to another trader, buying appetite for 50 ppm gasoil has been boosted by the lockdowns. "There was strong demand...all these people working from home, they were heating up their homes. It has not been warm recently. Overall it increased the demand.

As recently as Tuesday, 50 ppm gasoil barges in the Amsterdam-Rotterdam-Antwerp hub were assessed at a highly unusual premium -- of 25 cents/mt -- over ULSD barges.

All else being equal, lower sulfur products trade at a premium to their higher sulfur counterparts, being more expensive to produce. While it is not unusual to see 10 ppm diesel fill 50 ppm shorts, using 10 ppm diesel to replace 0.1% gasoil is extremely rare.

S&P Global Platts data showed that before the outbreak of coronavirus, ULSD barges in ARA were last assessed at discount to 50 ppm gasoil barges on June 27, 2013.

Sources said the use of more expensive, lower sulfur diesel to replace higher sulfur gasoil in domestic boilers will not continue once European diesel markets switch over to summer specification, a trend that will likely exacerbate the oversupply of ULSD heading into summer.

While in Germany, the maximum sulfur content for gasoil to use as heating oil is 50 ppm, other countries such as France, Greece, Italy, Spain and Switzerland have a maximum of 1000 ppm.

The UK does not use gasoil as heating oil but kerosene instead. Any diesel used as heating oil needs to be dyed for tax purposes and not contain biofuels.

"50 ppm is more being supplied with ULSD right now but this will end soon since diesel will step over to summer grade. Due differences in the cold properties, intermediate and winter period diesel can go into the 50 ppm spec, but the summer diesel cannot," a third source said.

The source that will likely lead to a supply glut of ULSD later this summer in Europe. "I do not think the drop in ULSD consumption is as bad as for gasoline. You still have agriculture and trucking using diesel, but that demand will drop over the summer is indeed expected."

Platts assessed FOB ARA ULSD barges at a fresh four-year low of $270.25/mt Wednesday, at parity with FOB ARA 50ppm gasoil barges, while FOB ARA 0.1% gasoil barges were assessed at$254.50/mt, also a four-year low.