Gasoil EFS weakens despite mounting European stocks; Asian strength pauses

Singapore — The northwest Europe middle distillate market could see a fresh wave of arrivals from Asia and the Middle East as the arbitrage gates swung open Wednesday amid a widening Exchange of Futures for Swaps.

The front-month September EFS -- the difference between Singapore 10 ppm swaps and ICE low sulfur gasoil futures, and a key measure of the arbitrage window between Europe and Asia -- was assessed at minus $8.03/mt at the Asian close Wednesday. Platts had assessed the EFS at minus $7.64/mt on Tuesday.

The spread was last assessed lower on June 17, at minus $8.61/mt, Platts data showed.

This dip in the EFS comes despite a weakening European diesel market as traders spoke of a lack of demand and rising stocks in the Amsterdam-Rotterdam-Antwerp trading hub.

"There is a lot of oil, it is heavy on prompt, inventories are pretty high and oil from the US is going to end up in ARA," a trader said Wednesday.

This weakness is now being compounded by expectations of rising arrivals from the East of Suez, traders said.

"The EFS is weakening, which will attract more barrels for sure," the trader added.

Another trader said "the East/West has blown wide open, diesel will get poured into Europe right, left and center in the next two months".

Adding to that, the short-term outlook is mixed as some refineries were scheduled to undergo maintenance in September and October, but fewer than initially expected due notably to good refining margins.

"Maintenance doesn't nearly look as big as it looked two months ago," a trader said.

"In July, refinery maintenance was heavy, now margins are decent, so the [European] autumn maintenance will be cut in half and expected to follow US schedule of September-October." In Europe, autumn refinery turnarounds usually take place in October-November.

Looking east, sources said the Asian gasoil market was "pausing for a breather", after chalking up gains for nine straight trading sessions.

This upbeat momentum led by a tighter-than-expected supply on the back of rising Chinese demand and against a backdrop of still-tight regional supplies propelled the FOB Singapore spot gasoil cargo premium to a year-to-date high of plus 44 cents/b on Tuesday, before retreating to 33 cents/b the next day.

"[Asian gasoil] market is seeing better demand and IMO 2020 is coming. Sentiment is bullish ... but perhaps a bit overdone," a trader based in Singapore said.

The slight setback was also evident in the derivatives market with the front month September/October intermonth spread narrowing 11 cents/b to plus 13 cents/b on Wednesday, Platts data showed.

Rising middle distillate inventories in Singapore also pointed to a slowing Asian gasoil market.

Enterprise Singapore data showed that middle distillate stocks rebounded from a seven-week low during the week ended August 14 to 10.96 million barrels, up 10.8% from a week ago.

This prompted some industry sources to keep a watchful eye on the next inventory report due later Thursday, for further pricing cues.

--Su Yeen Cheong, suyeen.cheong@spglobal.com

--Ng Jing Zhi, jz.ng@spglobal.com

--Christopher Ewen, christopher.ewen@spglobal.com

--Gary Clark, gary.clark@spglobal.com

--Edited by Norazlina Juma'at, norazlina.jumaat@spglobal.com