Driving Discussions Europe: Pricing diesel in 2024

After more than a year without Russian diesel in Europe, a new pricing paradigm is emerging for European diesel, as Josefine Ahlström and Alfonso Berrocal explain in this latest episode of Driving Discussions Europe.

Understand what the new flows look like, why this means some consumers are now paying a premium, and why a new pricing mechanism is needed to capture today’s reality for this market.

In this episode, we dig into price transparency, value differentials between different European diesel specs and the impact of longer freight distances for the European market.

Josefine: Hello, good day. And welcome to "Driving Discussions Europe." In this series, we discuss the forces that affect road fuels markets globally and in Europe. This is brought to you by Argus Media, a leading, independent provider of energy and commodity price information.

We now had more than a year without Russian diesel in Europe. As in February 2023, diesel of Russian origin was banned in Europe. It is absolutely one of the most fundamental structural changes we have seen for European road fuels, and as a result, Russian imports are replaced with imports now from east of Swiss and the U.S. This ban had a major impact on the diesel supply chain, how diesel is traded in the commodity markets, but also importantly, how the value of diesel is set for the European market. For us at Argus, who provides pricing of commodities such as diesel, this new reality simply means there is a new pricing paradigm emerging for diesel. So, let's explore that in more detail in today's podcast.

My name is Josefine Ahlström, VP Business Development Europe at Argus. And with me today is my colleague Alfonso Berrocal, European Business Development Manager specialized on distillates. So, good afternoon, Alfonso, and good to have you here today.

Alfonso: Hi, Josefine. Good afternoon. And thank you for having me.

Josefine: So, tell me, Alfonso, so what do you see here? What has been the impact of the ban of the Russian diesel on the European diesel trade flows?

Alfonso: Well, before Europe and the UK banned Russian diesel, most of northwest European imports had been supplied by hand-sized cargoes of about 30,000 metric tons, which they were loaded in the Russian Baltic Sea in places like Primorsk. And after that, they were discharged in what is called geo-rotational order into Poland, Germany, ARA, the UK, and different ports in France.

After the Russian diesel ban, the import barrels comes either from an LR2 cargo ranging 90,000 to 100,000 metric tons, which has been loaded in the Middle East or India, or otherwise from MR cargoes, which range about 40,000 metric tons are loaded in the U.S. Gulf Coast. Because of the much bigger size of these cargoes, these LR2 shipments tend to discharge mostly into ARA, where they break bulk. What you have next is 30,000 metric tons cargoes being reloaded in ARA and sailing either to Germany and Poland, where they must compete with Swedish and Finnish suppliers, or they go towards UK and France. So, basically, we can say that ARA has become the new Primorsk, and the old geo-rotational order east to west has been broken.

Josefine: So, how has this change in the flows you're now describing affected the pricing structure for diesel in Europe?

Alfonso: Well, the current benchmark in Europe is still a CIF-ARA 30kt cargo, reflective of French specs discharging in geo-rotational order in a basket of ports ranging between Poland and northern Spain. So, the current benchmark is outdated and not reflective of the market. On the other hand, German buyers, who were almost the first stop before to get those Russian cargoes are now one of the last stops, and therefore, they're paying a premium because of the extra freight. That premium is exacerbated during the winter months because Russian diesel was very good meeting the more restrictive German winter specs. However, the new barrels coming from east of Suez sometimes struggle to meet the minus 22 CFPP values depending on the origin. Therefore, German specs have been paying a premium above French specs. And that cold properties spread that has been seen as high as $5 to $6 is reflected in the price of the FOP barge German spec.

Josefine: So, in terms of pricing, what does it mean? So, what are the key pricing points to look at to really understand these values, for example, with differing between German and French diesel, but also, how sort of this breaking bulk is going on as this import cargoes arrive into Europe? So, what should someone look at when they try to really understand the values here along the supply chain?

Alfonso: Right after the war broke in Ukraine, we launched a SIF-ARA and SIF-West Med LR2 prices, which are reflective of those 90,000 to 100,000 metric ton cargoes discharged into Europe. And those prices capture the value of the import parity barrel, so the cheapest barrel being imported into north-west Europe. Furthermore, in September 2023, we launched a FOP-ARA 30kt assessment, which captures the value of those diesel 30,000 metric tons cargoes which are meeting French specs at the point of highest liquidity when they are reloaded from ARA. And we, of course, continue publishing the FOP barges assessment meeting German specs. And in order to add transparency, we have launched a trade initiation screen using our own technology, Argus Open Market. In the Argus platform, the market can place orders in real time basis on a nice gas oil differential. So, what we are looking for on that trade initiation screen is to EFP transactions. And I want to highlight that we have been registering activity consistently during 2024 in this FOP-ARA 30kt cargo stack, and that we as well have registered activity in these months in the CIF-ARA LR2 stacks because the market needs these prices and we expect activity increasing in the coming months.

Josefine: So, are you saying then, Alfonso, that those companies who are now placing sort of bids and offers, for example, on the screen, that they actually...sort of do you think this is the way the market should be priced going forward?

Alfonso: We think so. We think that the market needs a more reflective price and the market as well is increasing. And the number of EFP transactions versus using an index and our platform is perfect for that purpose. The market can either select and initiate trade on those LR2. That will be the first stop. Those big cargoes landing into Europe or otherwise, they can as well use the stack for the FOP-ARA 30kt price, which is the point of maximum liquidity. So, we expect that this should be the way to go rather than getting stuck to the old dated benchmark.

Josefine: So, Alfonso, for those who may not trade gasoline regularly, do you just want to explain very briefly what EFP stands for and why this is useful as part of our pricing?

Alfonso: EFP stands for Exchange of Futures for Physical. And it is an agreement between two counterparties to swap futures position using the underlying physical product, in this case, the cargo. And that swap is registered in an exchange. So, for instance, a seller is loaned physical and short futures, and in one hand delivers the physical cargo to the buyer, and on the other hand, exchange his futures positions by the buyer's future position.

Josefine: So, what you're saying is that you swap positions with each other and that sort of facilitates the whole net settlement that you actually do between the counterparties.

Alfonso: Correct.

Josefine: Okay. Great. But then moving on from how we price this new pricing paradigm, if you call it that way, so, what are we seeing in the market here? What does the pricing structure look like and anything we should expect in the coming weeks, months here as we're having spring fully upon us?

Alfonso: So, the market continues short and backward-dated. I mean, it's structurally short. With a high diesel crack for historic standards, as far as the crack is above $20 per barrel, it will be high for historic standards. And obviously, this is due to the lack of refining capacity and as well, because there are several units of maintenance in the refinery landscape now. However, on the other hand, demand like in places like Spain and particularly in Germany has been very weak. And a symptom of this weakness is that the barge price is trading today below the FOP-ARA 30kt cargo price. And this means that the demand for German specs product is really weak because it's trading below the French spec.

Now, there are several factors that may change this somehow bleak picture. The specifications, they should now very soon transition into summer. The demand in Germany could improve because of the harvest season, and the flow of LR2's landing in Europe should be less volatile due the Red Sea attacks as the route around the Cape is more stable now. All these points could take us to a more liquid and healthy market, of course, if nothing else happens. But the underlying fundamentals of supply-demand in Europe are still fragile.

Josefine: Thanks, Alfonso. This has been very insightful to listen to. So, what you're saying is diesel flows change direction. Poland and Germany used to be the first stop for Russian cargoes. These countries are there for now the last stops as the diesel instead arrives from the U.S. and East of Suez. And pricing paradigm? Well, what we are also saying is that the safe cargo pricing of vessels arriving to the ARA does not really reflect how the market operates these days. There is more liquidity on cargoes being sent out from ARA on a FOB basis as LR2 vessels break bulk in ARA. Hence, for anyone wanting to understand the fair value of this new so-called diesel reality, prices for FOB-ARA 30kt cargoes and LR2 vessels, that makes much more sense.

With that, I would like to say many thanks for listening to this podcast. If you enjoyed it, please be sure to tune in for other episodes in our series, "Driving Discussions Europe." And for more information on Argus global refined products coverage, please visit our oil products commodity page. Stay safe, and see you next time. Bye-bye.