FEATURE: Hungry for diesel, Europe looks to US and Asia to fill Russia gap

European diesel markets are set for more delirium as new measures against Russian oil, are likely to press an already overstretched distillates complex.

European diesel crack spreads and prices have skyrocketed following Russia's invasion of Ukraine, as the market is searching desperately for alternative sources of supply, with some traders expecting the price surge to cause some demand destruction.

Profit margins for diesel and diesel cracks in Europe flew to record highs of almost $60/b on March 8, before softening slightly March 9 amid huge volatility. The FOB Amsterdam-Rotterdam-Antwerp ultra-low sulfur diesel physical barge crack versus Dated Brent was assessed at $59.20/b on March 8, the highest since S&P Global Commodity Insight started assessing this price in October 2007, before retreating March 9 to $35.45/b.

The US March 8 banned all imports of Russian oil, refined products and LNG, while the UK the same day said it will "phase out" Russian crude oil and product imports by the end of 2022. With pressure on EU countries to follow suit, traders are turning to US and the Asia for cargoes.

"Diesel is a disaster. It looks quite gloomy [in terms of supply]," one middle distillate trader told S&P Global Commodity Insights.

Europe is net-short diesel and around 60%-70% of its diesel imports flow from Russia. The US, the Middle East and India also supply diesel to Europe, but these volumes have been constrained lately due to shrinking stocks and low regional production.

"The world, as a whole, is short distillate molecules," a second trader said. "Europe cannot price up alone. Everyone else will bid up too now."

Europe's hefty reliance on Russian diesel means it is very exposed to supply vulnerabilities and traders are starting to look all across the world for any drop of diesel they can get hold of.

Traders have begun to see the impact of rocketing pump prices hitting consumers, with the mixed effect of buyers rushing to the pumps to secure fuel before prices rise further, while the buying surge is anticipated to tail off as the high costs bite and consumers try to minimize consumption.

"Every day there is an increase at the pump, demand destruction will be inevitable," a diesel trader said.

Arbitrage open

While still managing to sidestep direct sanctions on Russian oil and refined products, there is increasing pressure for the European Union to follow in the UK's and US' footsteps in banning Russian-origin imports. Even ahead of formal sanctions, self-sanctioning by a growing portion of European entities has resulted in widespread avoidance of Russian diesel.

Flows of ultra-low sulfur diesel from East of Suez to Europe are set to total only around 443,000 mt in March, but are set to rise to around 668,000 mt in April, according to data from commodity intelligence firm Kpler.

High prices and a tight market in Asia alongside high freight costs and strong backwardation have meant economics to send Asian diesel West have been unworkable. However, there has been an influx of new fixtures from East of Suez to Europe in light of rocketing prices, which could help alleviate a supply crisis.

The tankers Aristos, Arctic Char, Virgo and Super Ruby were heard fixed March 8 to bring ULSD from various locations East of Suez, including for UK Continent or Mediterranean delivery options, with cargoes totaling around 200,000 mt for mid-March loading.

More cargoes are expected to be fixed on the route, with European traders now saying the arbitrage economics have taken a U-turn and the arbitrage to send product to Europe is now workable.

Looking West, flows from the US to Europe are also expected to return, according to some European traders, with flows having been virtually non-existent since the beginning of 2020.

Flows of ULSD from the US to Europe are set to jump to around 323,000 mt in March from only 71,000 mt in February, according to Kpler data, with the journey time notably shorter across the Atlantic than from East of Suez, resulting in earlier arrival dates.

There has also been an uptick in shipping fixtures from the US to Europe, including at least two diesel tankers: Energy Centaur, set to bring around 60,000 mt from the US Atlantic Coast and Ardmore Encounter bringing around 38,000 mt from the Gulf Coast. There were several other clean tanker fixtures where product details were not available.