European refined product markets surge to record highs amid Middle East war

The European clean refined products markets have continued to see rising impact from the intensifying war in the Middle East, with market participants bracing for unprecedented supply tightness as ship traffic through the Strait of Hormuz remains absent.

As the war between the US and Iran continues, a number of refineries in the Middle East have either halted operations fully or reduced runs, according to data from Platts, part of S&P Global Energy. A prolonged escalation could choke off key ULSD, jet and LPG export routes from the Persian Gulf and Red Sea, amplifying volatility across the barrel.

Flat prices and product cracks have both strengthened as traders price in the supply disruption, with middle distillates leading the rally as Europe is net short on diesel and jet fuel and heavily reliant on the Middle East for supply.

Jet fuel

The European jet fuel market has seen the most profound impact due to heavy reliance on imports from the Middle East.

The Platts jet CIF NWE cargo flat price rose to an all-time high of $1500.75/metric ton on March 11, while the Platts jet CIF NWE cash premium to ICE LSGO M1 hit a record high at $400/mt.

Market participants are expecting acute supply tightness in April and May because of the lack of ship traffic through the Strait. The Middle East accounted for over half of jet imports to Europe last year, according to S&P Global Commodities at Sea.

The backwardation in the jet CIF NWE swap differentials also soared to all-time highs, with the April/May backwardation assessed at its steepest level on record at $135/mt on March 11.

Diesel

In the European diesel market, financial cracks have gained considerable strength while physical fundamentals remain relatively balanced.

On March 11, Platts assessed the Mo1 crack at $48.7/b, up 65.8% from the $29.38/b assessed before the commencement of strikes on Feb. 27.

The significant upward momentum in cracks reflects anticipated tightness in European diesel supply.

The market until now has remained balanced, with supply supported by discharges from tankers which loaded prior to the US- Iran war and ample European stocks.

However, market fears of an imminent supply shock grow as oil products accumulate in the Persian Gulf, unable to transit the Strait of Hormuz, and refineries begin reducing throughput due to a lack of product storage and tight feedstock supplies.

The impact has also been felt in West Africa, where diesel prices have spiked significantly more than gasoline, owing to a mix of heightened shipping costs and rising Dangote prices.

Platts most recently assessed the STS Lome Diesel price at $1137.75/mt and a $90/mt premium to ICE LSGO April futures. The price has risen from $763.75/mt before the war.

The spike was partly due to a large jump in prices at the Dangote refinery, which responded to the jump in global crude. The refiner set gantry prices at Naira 1430/liter May 10, which is $1255/mt when converted using the day's fx and 0.845kg/l density.

Looking forward, market participants said a "dry" market could be approaching for diesel with Asia now competing with WAF for Indian barrels.

Gasoil

The CIF Mediterranean cargo flat price of 0.1% gasoil between ICE LSGO futures rose $337.25, or 45%, since Feb. 27, with Platts assessing it at $1,079/metric ton on March 11.

According to one European-based market participant the Mediterranean 0.1% gasoil cargo market is currently tight amid strong demand into North Africa and reduced product flows from the Red Sea into Europe, driven by supply disruption risks stemming from the war in the Middle East.

Additionally, ongoing robust demand from North African buyers is further contributing to the firm market conditions, according to the same source.

Naphtha

European naphtha market saw considerable strength amid volatility on Middle East conflict.

On March11, Platts assessed the front-month CIF NWE naphtha swap at $728.50/mt, up $42.50/mt on the day, while front-month CIF NWE naphtha crack was assessed at minus $6.96/b, stronger by $1.01/b.

"I mean, [there is] a war in one of the regions, which is long 4.1 million mt/m of naphtha," so "everything is strong," a Europe-based trader source said, adding that "supply and demand [of naphtha] will be cut that will impact arb flows" and "overall freight is very expensive" as a result of the conflict.

LPG

In the propane market, extreme volatility continues to dominate fundamentals, while backwardation has widened amid rising tightness in the prompt end of the forward curve.

Platts assessed the spread between the propane CIF ARA balance-month and the front-month contracts at $84/mt backwardation on March 11, compared with $42/mt on Feb. 27.

Participants in the Northwest European LPG market are increasingly opting for balance-month pricing, reflecting widespread uncertainty about where prices will settle in April, sources said.

The Middle East exports around 30% of global LPG volume according to CAS shipping data.

Gasoline

In the gasoline markets, cash differentials have strengthened, particularly in the Mediterranean, as participants weigh out the possibility of lower available volumes.

Platts assessed the FOB Mediterranean gasoline cargo at $943.75/mt March 9, reaching a near two-year high.

"People seem to be buying for security of supply too, which is making [the] issue worse," a European trader said.

The increasing shortage in Asia has also seen an increased volume of European barrels flowing out, sources said.

"Mostly from ARA, as Med can't afford to lose oil right now." the European trader said.