ICE gasoil unlikely to go negative, but traders point to risks

London — ICE low sulfur gasoil futures are not expected to trade in negative values as storage options at the coastal Flushing-Amsterdam-Rotterdam-Antwerp-Ghent trading hub appear adequate for now, despite increasing floating storage. Traders did however, identify some risks.

"I don't think ICE LSGO can settle at negative -- ARA tanks are not full yet," a source said. "But then again, nothing in the market is normal these days."

While ICE LSGO futures are unlikely to settle into negative territory, the market remains oversupplied with middle distillates, the source said.

"We need to get rid of the coronavirus and lift the lockdowns," because nothing else will be able to balance Europe's refined product market, he said. Until then, "it's going to be a bumpy ride."

Front-month ICE low sulfur gasoil futures traded at a new low of $225/mt, or around $30/b equivalent, in European trading Tuesday morning, after the WTI crude oil price traded negative on Monday, a day ahead of expiry, as a lack of storage capacity in Cushing, Oklahoma, forced traders to exit positions ahead of Tuesday's contract expiry.

NYMEX WTI settled at minus $37.63/b Monday, down $55.90/b on the day. The ICE LSGO flat price typically follows Brent futures, with the front-month trading as low as $21.78/b Tuesday morning.

Like WTI futures, the 10ppm diesel physical underlying of ICE LSGO futures is delivered into a hub, and is seeing unprecedented levels of demand destruction amid government restrictions to combat the coronavirus.

More flexible

The one big difference between the two contracts is that WTI is priced at landlocked Cushing, while both ICE LSGO and ICE Brent are at terminals, with access to a port, inland storage, tankers and barges.

"[ARA] is a lot more flexible than Cushing where you have to have approved tanks. As such it is easier to spend money getting a barge to take delivery and wearing the demurrage on making it floating storage so there is limit to the downside as there are economics which can drive the floor," said Chris Midgley, global director of Analytics at S&P Global Platts.

Inland storage capacity for clean products looks available, although barge freight rates are rising, as are floating storage volumes of clean product in and around Rotterdam.

Across all products, total ARA storage stood at 5.8 million mt as of April 15, according to data from Insights Global. This is 5% higher than a year ago, and almost 50% of total recorded tank capacity across all products of 11.5 million mt. Diesel and gasoil stocks made up around 2 million mt out of the 5.8 million mt, data showed.

Sources also said that outside of the ARA hub, Europe still has room left to store middle distillates. Floating storage is also being used actively, especially for jet fuel, gasoline and diesel, with a handful of tankers already being seen in both Northwest Europe and the Mediterranean.

Risks abound

Hypothetically, paper-only market participants will be the most prone.

They could find themselves in a situation where they are forced to close out positions by offering when there are no bidders, in which case negative prices could be a possibility, although bidding by buyers with some physical storage capability would likely provide a floor, according to a source.

Another market participant also identified Exchange Traded Funds, which can only hold long flat price positions, as a potential driver of negative pricing.

"They still hold a lot of flat price. If it [ICE LSGO] goes negative the ETF will have to get out of its position as it can't go negative by construction," a trading source said.

"So by construction there is a risk," he said. "Assume all of a sudden one of the larger ETFs has to get out of 200,000 lots, never before have we had a position so large that it has to get unwound."

Buyer options

A representative at ICE was not immediately available for comment.

In the final month of trading in a contract, the ICE Exchange contacts holders of LSGO positions to confirm their intent and capability of making or taking delivery, and may require that traders reduce position sizes to ensure physical price convergence with the physical market and maintain market integrity, according to the European Securities and Markets Authority.

"Although a buyer is obligated to take delivery and should payment by a buyer not be made then costs associated with the delay would be taken from the margin account, the product maybe sold elsewhere," ICE said on its website. "Before delivery a buyer may be asked by the exchange to put down the full cost of the purchase."

Should a buyer default, the seller may also make delivery wherever they choose, it said.

Ahead of expiry, the front-month ICE LSGO contract can be highly volatile as traders close out their positions. The May ICE LSGO contract expires on May 12.

ICE low sulfur gasoil futures are typically settled two working days prior to the 14th of the month, with physical delivery of the underlying 10ppm diesel taken in the FARAG trading hub between the 16th and last calendar day of the delivery month. One contract is equivalent to 100 mt, with a mandatory delivery limit by one market participant of 2,000 lots, or 200,000 mt.

In November 2018, the front-month spread traded as high as $41/mt intraday on the day of expiry of the front-month contract, before dropping back to be last traded before the 1200 GMT expiry at $5.25/mt.

This was when a drought on the Rhine limited the movement of barges from the ARA hub to inland demand centers, drawing stocks in the region as cargoes that typically resupply the hub found alternative disports in Europe.