NWE 0.1% gasoil premium to Med hits all-time high as market demand diverges

New York — Cargoes of 0.1% gasoil in Northwest Europe reached their highest premium on record to 0.1% gasoil cargoes in the Mediterranean on Friday, a trend that highlighted two different pictures of demand in the respective regions.

In Northwest Europe, in places from France to Switzerland, sources have said that demand for gasoil remains robust as restrictions on travel intended to limit the spread of coronavirus have not adversely affected residential heating demand.

"We are seeing [market participants] buying more heating oil and less diesel...this makes sense, as one cannot drive his car but must keep his house warm," a cash market source said late last week.

Another spot market source based in France last week said that compared with ULSD, demand for 50 ppm and 0.1% gasoil, is now so strong that ULSD is being downgraded in France in order to supply the market with distillate blends higher in sulfur. "We still have very strong demand for heating oil, we can't fulfill all of it as the 0.1% gasoil market is rather tight," he said.

While winter grade ULSD at 10 ppm sulfur can be economically downgraded into 0.1% gasoil in France, this trend is unlikely to continue past mid April, according to sources. Due to differences in cold properties, summer ULSD cannot be downgraded into 0.1% gasoil, a trend that could both put downward pressure on ULSD prices and support 0.1% gasoil prices, so long as the coronavirus lockdowns continue.

By contrast, the Mediterranean, which has an overall warmer climate than Northwest Europe, has seen a more precipitous drop in gasoil demand, with some players who are normally short on 0.1% gasoil now finding themselves long on product according to a trader Monday. "The same people in the Med that normally import gasoil are now exporting. This is why Med 0.1% market so weak," he said.

Last week, Egypt's Midor refinery issued a tender to sell a 0.1% gasoil cargo into the Mediterranean, which one source said was unusual because the company is normally a net purchaser of 0.1% gasoil.

In Egypt, unlike Europe, 0.1% gasoil is used as a road fuel and by extension, demand there has been more severely affected by lockdowns to prevent the spread of coronavirus.

On Monday, a different source said that Algeria's state-owned Sonatrach – another perennial buyer of 0.1% gasoil – has also issued a rare tender to sell the product. He added that the Mediterranean 0.1 % gasoil market seemed rather quiet Monday and that liquidity seemed worse than usual. "I do not think it is good as Egypt and Algeria are selling," he said.

Considering that the Egyptian and Algerian markets use 0.1% gasoil as a road fuel, gasoil cracking margins help explain why the Mediterranean refining complex has seen output collapse to a much greater extent that in Northwest Europe. At the start of April, S&P Global Platts Analytics estimated some 1.819 million b/d of Mediterranean refining capacity would be lost to discretionary run cuts, maintenance, and idling of units as refiners grappled with plummeting by margins, more than 10 times the 180,000 b/d of lost capacity expected to be lost in Northwest Europe for the same reasons.

"At current prices, I would buy five Med FOB gasoil 0.1% cargoes, but I cannot find a single one on an FOB basis. No refinery in Med wants to produce at these prices and nobody selling," a source said Friday.

In that context, CIF Mediterranean gasoil cargoes at 0.1% sulfur were assessed at a $44.5/mt discount to CIF Northwest Europe 0.1% cargoes on Friday, the widest spread on record since the assessments first started to coexist in January 2008. The previous record was a $10.50/mt discount from the assessment on October 16, 2012.

While this spread helps highlight that market demand in Northwest Europe has been more resilient than demand in the Mediterranean since the pandemic began, it is worth noting the two assessments are not identical. In Northwest Europe, Platts assessments reflect French Fuel Oil Domestique (FOD) quality gasoil and in the Mediterranean, Platts assessments reflect Spanish (B&C) quality gasoil.