Northwest European premiums for delivered cargoes of ultra-low sulfur diesel rallied to five-week high levels Thursday, buoyed by tight prompt availability.
In Northwest Europe, CIF cargoes were assessed $5.75/mt above front-month ICE low sulfur gasoil futures, the strongest premium recorded since March 7 when it was $6/mt.
Trading sources attributed the lack of prompt barrels to a busy delivery program resulting from the expiration of the April ICE LSGO contract which boosted interest for prompt barrels and uncertainty around next month's Baltic program which put a momentary curb on selling interest.
"We are waiting for the next month's Baltic program...so it's unlikely that new offers will come until the May Baltic program is known," a trader said. "On availability out of ARA...logistics are currently strained with the Platts [Market on Close] volume and the ICE delivery. So net net, the oil is there [but] you might just see a few days where people are less keen to offer."
"We need to buy oil for our terminals, and we don't get offers in the CIF markets anymore, if [we do], then they are very expensive. It seems ARA is much tighter than many people thought," another trader said. "There's no way the differentials can stay here, people will have to pay up."
In addition to thin prompt availability, unworkable arbitrages from the East of Suez and the US Gulf Coast have also cut into diesel resupplies to Europe, providing further support to stronger premiums. "There will always be oil [coming even when the arbitrage is closed] but there is a significant difference between an open arb flow and the 'noise' of oil that comes," a third trader said.
PAPER MARKETS
While inventory levels in ARA remain well above historical averages, holders of product were in no rush to draw volumes out of tanks as the market contango structures continued to foster delayed selling. The second-month June LSGO contract was trading at a $4.50/mt premium to the front-month May contract Friday morning.
The paper markets, arguably, smelled the tightness in prompt cargoes prior to physical markets, as the CIF NWE cargo balance-month swap shot up from $3/mt assessed Monday all the way up to $5.25/mt Thursday, a 75% jump in the course of merely three days. The May swap meanwhile edged up more modestly from $2/mt to $4/mt.
The gain in the balance-month April swap is all the greater considering that between the above dates the other leg of the said swaps, the ICE low-sulfur futures contract, rolled from April into May. The former expired at $360/mt Tuesday 1200 GMT, according to ICE, passing the baton to May futures which, given the contango structure in the market, began trading at a higher level compared with April and has subsequently remained strong. The May contract was assessed at $376.75/mt Thursday.
The above means that the differential swap is often brought down when the front-month futures contract expires in a contango market. However, it seems this impact on diesel cargoes was overshadowed by futures delivery sending players scrambling for prompt barrels.
