Widening negative gasoil EFS set to increase East-West arbitrage flows

The March gasoil Exchange of Futures for Swaps spread has widened in recent trading sessions to a more-than-six-year low and would likely increase the flows of Asian barrels to the West, further tightening already lean supply balances in the region.

The EFS is the spread between front-month Singapore 10 ppm sulfur gasoil swaps and the corresponding ICE low sulfur gasoil futures contract, and an arbitrage barometer for cross-regional flows from the East of Suez into Europe.

The front-month EFS was last assessed at minus $33.11/mt at the 0830 GMT Asian close Feb. 4, the lowest level seen since Aug. 20, 2015, when it was assessed at minus $33.33/mt, according to data from S&P Global Platts.

Traders have previously said the arbitrage is generally open with EFS values of minus $10/mt to minus $15/mt.

The EFS has been widening rapidly since mid-January, with the spread tumbling from the highest level seen in the month at minus $13.89/mt on Jan. 17, reflecting a 141% drop within the span of 12 trading sessions in Asia, the data showed.

While tight supplies of gasoil cargoes were keeping prices for the product well-supported in all pricing centers earlier in January, more recent developments in the West have bolstered the gasoil complex there further, outpacing the strength in Asia and widening the EFS spread.

The prompt spread in Europe's distillate ICE low sulfur gasoil futures surpassed the $20/mt mark for the first time in 14 years at a $22.75/mt backwardation Feb. 4, widening $5/mt on the day, and reflecting a 28.17% rise.

The front-month ICE February low sulfur gasoil contract was assessed $34.75/mt higher Feb. 4 at $852.75/mt.

Escalating political tensions between Russia and the US have been striking fears about supply disruptions in the event of economic sanctions being imposed against Russia, boosting the gasoil complex in the West.

Adding further to supply-side woes, cyberattacks targeting oil loading facilities in the Amsterdam-Rotterdam-Antwerp refining hub, as well as in Germany, that began Jan. 29 also affected the flow of oil products, including gasoil, Platts reported earlier.

"The market is incredibly tight," one Northwest European trader said, adding that people were paying high premiums for cargoes.

"You can't find a cargo, it's really, really dry," one Mediterranean-based trader said.

Meanwhile in the US, freezing temperatures in Texas City have caused some producers to shut-in production amid power outages and ice disrupting trucking operations, providing further support to the market.

"[Developments in] Texas City over the weekend," were cited by a Singapore-based gasoil trader as an additional key reason behind the sharply widening EFS, alongside geopolitical tensions between the US and Russia.

East-West arbitrage set to increase

About 409,400 mt of East of Suez ultra-low sulfur diesel is set to arrive in Europe in February so far, according to Kpler shipping data, Platts cFlow trade-flow analytics software, and shipping fixtures. A sudden widening of the front-month EFS and easing freight rates are set to see further fixtures on the route in coming days as arbitrage economics open.

Agreeing that arbitrage of gasoil cargoes was becoming increasingly viable, a trader at a north Asian refinery said: "Freight looks also weak, [arbitrage is] more doable."

The freight for LR2 ships on the Persian Gulf-UK Continent and west coast India-UKC routes dipped to $21/mt and $16.94/mt, respectively, on Feb. 4, compared with an average of $24.91/mt and $20.20/mt, respectively, in January, Platts data showed.

As of Feb. 6, 102,000 mt gasoil had arrived in Northwest Europe, with a further 170,600 mt en route to the region, while the Mediterranean had received around 34,800 mt so far in February, according to Kpler shipping and Platts cFlow data.

The widening of the EFS spread and strong markets in the US and Latin America have also seen an uptick of shipments from the East of Suez across the Atlantic to the Americas.

About 231,900 mt of East of Suez ULSD is currently en route to the US for February arrival while about 449,800 mt of ULSD and higher sulfur gasoil are en route to Latin America, Kpler and Platts cFlow data showed.