European ULSD shipments to US set to surge as spike to record highs

New York — Cargo inquiries to ship ultra low sulfur diesel from Europe to the US Atlantic Coast surged on Dec. 2, continuing a run of unusually high volumes of ULSD making their way across the Atlantic as a reverse arbitrage holds firm.

At least four Long Range I tankers were heard on subjects Dec. 2 to ship ULSD, basis 55,000-60,000 mt, from the UK-Continent to the US Atlantic Coast, while three Medium Range tankers basis 40,000 mt were also heard on subjects for these shipments.

There has been a swathe of cargoes shipped in the fourth quarter, with ULSD shipments from Europe to the US spiking to a record high of 586,000 mt in November, according to commodity data company Kpler and shipping sources.

"There seem to be a lot of cargoes loading STS Southwold to the States, as well as the normal Continent-trans-Atlantic [runs]," a US-based shipowner said.

Some market participants suggested the source of the ULSD will from product received into Europe recently from two newly built VLCCs.

The Yuan Kun Lang -- a 308,000 dwt VLCC -- arrived in Southwold on Nov. 21 carrying ULSD and jet fuel, while the Yuan Hua Yang -- a 319,786 dwt VLCC -- is expected to arrive in Southwold around Dec. 4.

Floating storage inquiries for ULSD in Europe have declined in the past seven days due to unworkable contangos for charterers, with many now saying they believe the glut of ULSD caused by the arrival of the VLCCs will lead to more volumes being shipped to the US provided stagnant freight rates keep the arbitgrage open.

"It probably won't go on floating storage anymore, and with the volumes of supply here it works to ship it over to the US at current freight rates," a shipowner said. "But they will call a stop to volumes at a certain point."

Typically an importer of diesel from the US, Europe has been sending cargoes across the Atlantic in an unusual reverse arbitrage move amid weak demand in the European market as a result of widespread coronavirus travel restrictions and relative strength in the US.

"The interesting thing is that the US has performed quite well," a diesel trader said Dec. 1. "The diesel flows from the US to Europe were almost non-existent in the third quarter."

The strong spread between NYMEX ULSD and ICE low sulfur gasoil futures -- otherwise known as the HOGO spread – has provided an economic incentive to send barrels trans-Atlantic, according to traders, hitting a high of 12.61 cents/gal on Nov. 25, but averaging 11.49 cents/gal in November.

"The US has been the strength on the diesel for a while," a second trader said, adding that flows to the US have been helping to clear the length and volumes of diesel on floating storage in Northwest Europe.

Backhaul arbitrage still shut

With European diesel stocks long, the arbitrage to send US Gulf Coast ULSD barrels to Europe has remained shut for most of the second half of 2020. Additionally, demand for diesel and other petroleum products has also remained subdued in Latin America as countries there maintain social distancing rules and lockdown measures. The slowdown in USGC exports of ULSD to Europe and Latin America has curtailed freight in the Americas region for clean tankers that would typically achieve high returns in the winter months.

According to data from Platts trade flow software cFlow, vessel flows from the USGC to Europe peaked in March at 890,000 mt and declined into the third and fourth quarters. In October and November, volumes totaled 270,000 mt and 120,000 mt, respectively, cFlow data showed.

The diminished supply of European-bound ULSD cargoes has put bearish pressure on Medium Range tanker freight rates as owners have few options to move their ships. Freight on the 38,000 mt USGC-UK/Continent route on Nov. 3 hit a thee-year low of Worldscale 50, or $10.34/mt, and hovered around that level through to Dec. 2. As of Dec. freight for the trans-Atlantic route was down 52% year on year. A year ago it settled at $21.51/mt and two years ago at $29.07/mt.