US diesel supply to Europe recedes

US diesel and gasoil cargo arrivals in the EU and UK have contracted strongly on the month as arbitrage economics deteriorate and north American supply concerns prevented cargoes from being exported.

The EU and UK received 27,900 t/d of US diesel and gasoil during 1-14 August, Vortexa data suggest, down by about a quarter compared with July when the US delivered the highest diesel volumes to the continent in five years.

The transatlantic diesel arbitrage has closed, according to one European market participant, despite difficulties persisting in supplying Europe with diesel from other regions such as the Mideast Gulf and India. Argus calculations suggest that the US-UKC diesel arbitrage has narrowed from an average of $38.57/t in June to $27.89/t so far in August, while transatlantic freight rates have risen to four-month highs this month as gasoline exports from Europe to the US drove up freight costs.

One US-based charterer confirmed that freight levels are holding back US diesel cargo exports to the continent in the near term.

It also appears more profitable for US refiners to sell to the domestic market, instead of exporting to an undersupplied Europe. Steep backwardation in the Atlantic Coast diesel market has only recently flatlined as Canadian flows to New York and the surrounding region diminish and concerns rise around a more disruptive Canadian refinery maintenance season ahead.

Ultra-low sulphur diesel cargoes delivered to New York harbour rose to a six-month high of 320.70¢/USG on 9 August.

Northeast US stockpiles have also played a role in hindering potential exports. PADD 1b ULSD inventories — which include New York, New Jersey and Philadelphia — were estimated at 13.4mn bl last week, according to the Energy Information Administration (EIA). The figure reflects a 25pc drop from the more seasonal norms in the same period in 2021, prior to the start of the Russia Ukraine war.

The European market participant expected higher diesel prices to eventually bring more product to Europe. Diesel cargo cracks delivered to northwest Europe have averaged a margin of $36.44/bl against North Sea Dated this month — the highest since January. A widening European diesel margin should incentivise more sellers to deliver into northwest Europe and assuage supply pressures.

By George Maher-Bonnett and Craig Ross