EU diesel buyers want fewer, cheaper contracts for 2024

Diesel importers in the EU are generally looking for fewer term contracts in 2024 than they had in 2023, and are seeking to drive harder bargains after many felt they overpaid for their regular deliveries this year, according to market participants.

The twin trends of fewer and cheaper term contracts together reflect how European spot diesel prices turned out lower this year than many had expected. Importers noted that during the year they were finding it cheaper to buy in the spot market than to take contracted deliveries, where they had options over marginal volumes.

Some buyers said negotiations are circling around premiums as much as $10/t lower than a year ago. Term contracts for diesel are typically priced as a fixed differential to the average of spot quotes during the month of delivery.

Non-Russian diesel sellers had an extremely strong bargaining position when negotiating contracts for 2023, because the final months of 2022 brought extreme uncertainty about diesel supply in Europe. The UK banned importing Russian diesel in December that year and the EU was scheduled to follow in February 2023. Fob Amsterdam-Rotterdam-Antwerp (ARA) diesel cargoes averaged a $46/bl premium against North Sea Dated crude in the final three months of 2022, nearly four times higher than a year earlier.

But spot diesel prices turned out lower than many had feared in 2023, mainly reflecting how a late burst of Chinese exports at the end of 2022 pushed a wave of diesel from the Middle East and India towards Europe in the following months. This coincided with a deep lull in European industrial activity that quelled consumption. Fob diesel cargo premiums against Dated averaged around $22/bl in the six months after the EU ban was implemented, even briefly descending below the 2019 average of around $15/bl.

Since the exclusion of Russian supply, diesel delivered to the EU and UK on term contracts now tends to be from either the Middle East or India. Saudi state-controlled Aramco and India's Reliance both had term contracts to deliver diesel into Mediterranean and northwest European ports in 2023.

Diesel supply from the US tends not to be governed by term contracts. Market participants said the profitability of transatlantic shipments is variable, making it risky for a US Gulf coast refiner to take on an obligation to deliver to Europe every month. Even without term contracts there is a fairly reliable flow of diesel from the US Gulf coast to the UK, reflecting optimisation within the transatlantic downstream systems of US firms like ExxonMobil, Phillips 66, Valero and Chevron.

The amount of term contracted diesel imports to the EU and UK dropped year-on-year in 2023, and market participants said not every Russian contract was replaced by a non-Russian one. Some buyers said they intend to rely more on spot, which market participants said will probably be stimulated even more in 2024 by a continuing shrinkage of term supply.

By Benedict George