Feature: Amid ULSD price volatility, it's 'refiner's market' in Latin America

With daily price swings hitting $10/b in ultra low sulfur diesel market, Latin American traders fear that their once-steady supply is heading to Europe, giving refiners an advantage in tenders.

Latin America is a huge outright price buyer of refined products, mostly from the US Gulf Coast. But a fast start for tenders in 2022, especially large ones, has slowed in the rising price environment since the weeks leading to the Russian invasion of Ukraine.

Prices for ULSD especially have gyrated wildly in Latin America, as in much of the world, hitting record highs on March 8.

Argentina, for example, started 2022 at $96.28/b for delivered ULSD CIF cargoes for Platts assessments by S&P Global Commodity Insights. On Feb. 25, as Russia invaded, the price was $117.05/b.

The next seven days, it rose sometimes by double digits to hit a record $189.31/b. It fell $41/b the next day, gyrated wildly since then, including four days by double digits, before slipping $2.82 March 29 to $146.84/b.

Besides the fact that refiners make the product, traders need to sell at a premium and source their supply at a lower cost to make money in this volatile environment.

"Things are a little bit crazy right now," one market source said. "Tenders will favor refiners at the moment due to market volatility."

Petroecuador and Petroperu broke a month-long lull, with several large tenders in recent days. Petroecuador's purchase of seven premium diesel cargoes went to trading house Glencore.

However, Petroperu awarded refiners Valero, Phillips 66 and Marathon tenders for eight ULSD cargoes, three biodiesel cargoes and two gasoline cargoes. Colombia also awarded Valero two ULSD cargoes, although the Dominican Republic picked BB Energy for a high sulfur diesel cargo tender late in the week ended March 26.

Diesel stocks are low globally, but finding the barrels can prove fruitful based on premiums heard in the market. Petroecuador was paying a $7.45/b premium to Platts benchmark USGC ULSD pipeline, compared to slight discounts for previous tenders, sources said.

Sources said Argentinian wholesale power administrator Cammesa will give a good picture of whether refiners have an advantage when it awards a seven-cargo tender for fuel oil and five-cargo tender for HSD by the end of the month.

Cammesa's HSD tender is among the biggest in March but far shy of its 18-cargo one awarded to six entities in early February. Six cargoes went to Shell, two to Phillips 66, and two or three to Chevron, more than half the tender to refiners. For non-refiners, two cargoes went to Trafigura, one to Vitol, and either four or five cargoes to Gunvor.

"Cammesa is a big short," a regional trader said. In a volatile market like this, "I would think it favors refiners," the trader added.

Most of the tenders are seeking distillates as South America prepares for its winter season, but the loss of Russian diesel supply means that it has become the hardest barrel to find.

"It's just bad," another trader said. "There's a lot of uncovered demand. It's hard to find diesel molecules. It is not a buyer's or seller's market; It's a refiner's market. They are driving the bus here, and you might get lucky or not that they make a stop where you stand."

Traders do not expect many non-essential tenders, given the financial situation around lines of credit amid rising oil prices for buyers and sellers. As a result, the market was having a harder time even finding diesel cargoes to source.

Lenny Rodriguez, team leader for Latin American Oil Analytics at S&P Global, said March 29 that the arbitrage into Europe has been wide open in March, as the continent looks to offset the lack of Russian supplies.

"Volatility and uncertainty are the key drivers of this market, with Europe looking tight on distillates and competing strongly for molecules from the US," he said.

It was "impossible to take a short here as a position," the last trader said. "As a trader, you can really get burned. End-users play the loyalty miles card here."