NWE diesel-gasoil sulfur spread at six-month high on diesel tightness

The Northwest European diesel-gasoil sulfur spread has seen a volatile week, with value almost doubling to a six-month high due to tightness in ultra low sulfur diesel markets amid refinery works in the Mediterranean and a cyclone in India disrupting East-of-Suez supplies.

The spread -- which measures the differential between CIF ultra-low sulfur diesel cargoes and CIF 0.1%S gasoil cargoes -- widened to $62.50/mt June 19, up sharply from $32/mt at the June 13 close and the broadest spread recorded since Nov. 28, although it fell back slightly by the June 20 close.

This was mainly driven by the CIF NWE ULSD assessment rising $24.75/mt on the week to close at $44.75/mt June 19, a 123% increase.

The spread between FOB ARA ULSD and 0.1%S gasoil barges also widened to $50.75/mt the same day, the broadest spread since Nov. 7, before it fell back to $45.50/mt June 20.

Market participants attributed the surge in values to tightness in the supply of diesel, with "a combination of rerouting of East of Suez flows due to lower supply in the East and Australia, maintenance in the Mediterranean and Reliance refineries in India stuck with a cyclone firming up values," said a source.

Unplanned refinery outages in Europe have cut significant length from the diesel and gasoil markets. Multiple outages and unit repairs over the past week were noted at Shell Energy and Chemicals Park Rotterdam, Europe's largest refinery, and traders continue to cite problems at BP, Total and ExxonMobil refineries, among others.

"We have no idea why all the outages are happening," said a second source. "It could be hot weather, could be that they postponed maintenances because the margins were so good [over the] last 18 months."

A third source said: "I wouldn't even be surprised if [there are] some more [hiccups] come up. Nothing major necessarily, but because we haven't been building in Europe properly to have buffer stock, any production problems result in a strong market really quickly."

Previously, when Europe needed oil at a pinch, it could grab Russian barrels out of Primorsk or the Black Sea. With that option no longer available, barrels from further away are needed to solve the shortage, but obstacles remain in place preventing imports from the East, one of which is the Biparjoy cyclone which hit the west coast of India June 15.

While all ports on the Indian west coast have resumed operations since the storm made landfall, and all refineries in the region are running, according to oil industry officials June 20, shipping agents in India and brokers in Singapore and North Asia confirmed that some force majeure had been declared over the delay of shipments from the port of Sikka, near the Gulf of Kutch.

Strong demand in the East and sustained weakness in East-West arbitrage economics also continue to trap surplus barrels from the Persian Gulf and India in Asia, with Singapore's onshore commercial stocks of middle distillates rising to a nine-week high June 14.

"Singapore is pulling like crazy, as well as other places," said a fourth source. "[Fortunately] European demand is very weak...I would not even dare to think about what would have happened if demand was strong right now."

Meanwhile, European demand for gasoil remains low in the heating-off season, leading to falling cash differentials even though the gasoil market is facing similar supply issues on refinery outages.

Platts, part of S&P Global Commodity Insights, assessed the CIF NWE 0.1%S gasoil cargo differential at a $16.25/mt discount to the front-month ICE LSGO on June 20, down $3.75/mt on the week.

"Whenever this kind of stuff happens, the market shows volatility," said a fifth source. "It will probably be like this until mid-July, then it should ease off."