Gasoil EFS plunges to record low on strength in West

The April Gasoil Exchange of Futures for Swaps spread nosedived 49% in a single trading session to hit record low at minus $52.04/mt at 0830 GMT Asian close on March 1, as supply uncertainty jolted the Western gasoil complex.

This marked the lowest level the spread has been assessed on record, since assessments began in May 2009, S&P Global Commodity Insights data showed.

The EFS is the spread between front-month Singapore 10 ppm sulfur gasoil swaps and the corresponding ICE low sulfur gasoil futures contract, and an arbitrage barometer for cross-regional flows from the East of Suez into Europe.

The deeply negative spread reflects that Asian gasoil barrels can command a higher premium in the West, supporting East-West arbitrage flows.

In the European ultra-low sulfur diesel markets, participants continued to try to navigate the developing situation arising from sanctions against Russia.

While oil product exports from Russia are yet to be directly sanctioned by Western governments, companies are disassociating themselves from Russian exports due to political reasons and fears of supply disruptions in the future.

Some entities need to confirm whether they will or will not accept Russian product on a case-by-case basis, according to market participants, while some have already gone as far as to stop accepting Russian products.

"We can't accept cargoes from Russia anymore," one trader said, adding it was because some banks did not want to bring their names in connection with anything Russian.

Some market participants have said they were looking away from Russia as a source of supply in over-the-counter transactions, with preference for non-Russian-origin product being written into deal terms and conditions, while others have said they were still able to trade Russian barrels.

Furthermore, exports from Russian ports were becoming increasing untenable, with several shipowners halting bookings into the region as the Russia-Ukraine conflict escalates, making supplies from the country less reliable and accessible.

Many owners did not want to send their ships to the West due to the ongoing conflict, a source with a shipowner said. Despite rates seeing a rise, owners' earnings were still insufficient to cover the operating cost of running their ships, he added.

Rising freight, backwardation to cap arbitrage

Despite the widening in the EFS spread, arbitrage flows continued to face resistance from rising freight rates and a steep backwardation in market structure, which makes long-haul voyages less economically viable, market sources said.

"West is moving very strong, even in this very backwardated market we can see arbitrage opening slightly ... but freight is also moving up, both pricing center -- East and West -- are trying to get the cargoes," said a Singapore-based gasoil trader.

At Asian close March 1, the Singapore gasoil derivative M1/M2 timespread was assessed at $3.21/b, surging 49 cents/b, or 18% on the day to reach the highest level seen on record since assessments began in March 2001, S&P Global Commodity Insights data showed.

Furthermore, freight for East of Suez Long Range tankers, or LRs, was also rising due to the escalation of the Russia-Ukraine conflict and higher bunker costs, making procurement of arbitrage barrels more expensive.

The latest data from S&P Global Commodity Insights showed that the arbitrage incentive of moving cargoes from the Arab Gulf to the Mediterranean region or to Northwest Europe remained negative at minus $3/b and minus $2.25/b, respectively, as of Feb. 28.

However, nosediving EFS spread since could see arbitrage lanes opening.