Freight spike closes trans-Atlantic ULSD arbitrage amid freezing US weather: traders

New York — A spike in freight rates for clean Medium Range tankers on the UK Continent to US Atlantic Coast route had closed the arbitrage for European ULSD shipments, despite freezing temperatures in the US prompting a rally in the country's diesel market, traders said.

A cluster of cargo inquiries for trans-Atlantic shipments saw freight indications for UKC-USAC shipments, basis 37,000 mt, rise to $20.46/mt Feb.16, the highest level since August 2020, on the back of already tight tonnage supply in the continent.

Previously, the arbitrage for European ULSD had been workable, particularly for Long Range tankers, according to sources, but the spike in freight rates in recent days had outpaced the rally in the HOGO spread -- the difference between NYMEX ULSD and ICE LSGO futures -- leaving the arbitrage closed.

"With the freight spike it is completely shut for all class vessels," one trader said.

"I don't see it as open... Freight went up a lot. Maybe if you had a cargo last week it was open, but not for new ones," a second trader said.

However, earlier in the week beginning Feb. 15, no less than five clean tankers were put on subjects or fixed to bring ultra-low sulfur diesel from the Amsterdam-Rotterdam-Antwerp hub to the USAC, according to data from S&P Global Platts trade flow software cFlow and energy intelligence provider Kpler. The Stena Impression, the Elandra Oak and the Stena Important were fully fixed to each load a 37,000 mt ULSD cargo from ARA in the last decade of February to bring to the US, while the Evriki was fixed to load a 60,000 ULSD cargo around the same dates for the same route, Kpler data showed Feb. 18. Moreover, the Stena Immaculate was reportedly being discussed to load a 37,000 mt ULSD cargo from ARA around Feb. 25 to bring to USAC.

Further inquiries could be curtailed however, but shipping sources remain hopeful that the refining outages and potential tightness in US markets could keep flows working.

"I hear the arb has closed at these new levels, but some think we'll still get inquiry so long as the US Gulf is down," a shipbroker said.

Charterers could look for alternative vessel classes such as LRs should supply still be required, with LR rates not having risen so sharply compared to MRs.

The USAC market continues to be supplied by the product off the Colonial pipeline, but sources have aired concern that with US Gulf Coast refineries offline, volume of product may thin.

In Europe, prices for ULSD cargoes and barges have not yet responded to the situation, but one trader said some people were beginning to build cargoes from barges in ARA, supporting the otherwise downtrodden barge market.

FOB ARA ULSD barges were assessed at a $1.25/mt discount to front-month ICE LSGO futures Feb. 17, up from a $2.50/mt discount Friday Feb. 12.