Mediterranean turmoil, changes in demand drive middle distillates
By Daniel Colover, Rupert Rowling & Chris Vowden in London
July 5, 2011 - A key factor in the middle distillate market during the second quarter of 2011 was the continued strength of the Mediterranean ultra low sulfur diesel market and the relative premium the market commanded over the Northwest European ULSD market.
The Mediterranean ULSD cargo market had until the turn of the year typically traded between a small discount and parity to the NWE cargo market, however, the switch by Turkey from consuming 0.1% sulfur gasoil as a road fuel to 10 ppm sulfur diesel at the turn of the year has led to a structural change in the Mediterranean ULSD market. (Listen to related podcast: The second quarter in European gasoline, fuel oil and diesel).
The impact began to be felt around the start of 2011 and during the first quarter the Mediterranean diesel market on average commanded a $6.29/mt premium over the NWE cargo market. (See related chart: CIF NWE and CIF Med 10 ppm ULSD Spread (mean $/mt): January 4 - June 30, 2011).
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By mid-May a record premium of $16.25/mt between the Mediterranean and Northwest Europe was assessed.
This record spread in turn impacted arbitrage economics with the Mediterranean attracting greater volumes of arbitrage cargoes from the US Gulf Coast into the region and, in turn, away from NWE.
As a result the spread between the two regions, which through the second quarter averaged $11.15/mt, began to narrow significantly as the Med became better supplied at the expense of the NWE market.
Coupled with the increase in arbitrage cargoes into the Mediterranean was the returning from maintenance of a number of local refineries, increasing availabilities and also reducing requirements from those refiners that had been seeking cargoes during their maintenance periods.
This in turn led to the spread in the second half of June between the two regions narrowing to around $6.64/mt. However, buying remained strong enough to maintain the Mediterranean's premium to the NWE region.
Diesel Mediterranean strength fires 0.1% buying
The second quarter of 2011 also saw a stark contrast between the NWE and Mediterranean gasoil markets.
Strong demand came from North African countries such as Algeria and Egypt, and from Syria as well, as Black Sea supplies decreased, creating a constructive picture for gasoil in the region.
Equally, the strength of ULSD in the region drove desulfurization economics, with refiners looking to capitalize on the spread between 0.1% and 10 ppm, which at one point during the quarter stood at near $40/mt.
However, the picture was far less positive in NWE where the few pockets of demand for high sulfur gasoil that remain were not enough to cover the production of around 750,000 mt that comes out of the Baltic every month.
Increasingly the grade has looked towards export markets such as South America, West Africa and even the Red Sea to provide the main support for prices.
The acknowledgment of the slow death of the high sulfur market in NWE was illustrated by the announcement in June that the IntercontinentalExchange was to suspend open interest on ICE gasoil futures contracts past January 2015 and look to move towards a lower sulfur benchmark than the existing 0.1%.
Restored jet flows being ULSD and jet fuel into line
A lack of international supply to Europe and a rise in demand on approach to seasonal summer flying season gave support to the jet premium at the beginning of the second quarter.
Maintenance periods at refineries and an uptick in demand in the Persian Gulf, typically the source of incremental jet fuel supply to Europe, ate into the available volumes to Europe and saw the CIF NWE cargo premium assessed at a two year high of $107/mt over the front month ICE gasoil contract on May 10.
That marked jet out as the strongest performer in the middle distillate market, with refiners maximizing production of the aviation fuel over ULSD.
Flight disruptions due to the ash cloud created after the eruption of an Icelandic volcano on May 21 revived unhappy memories of last year's widespread disruption and saw a short-lived dip in differentials, but the market was quick to recoup any losses.
In the later weeks of the quarter, growing volumes from the Middle East and Asia kept a cap on premiums came as ULSD was gathering strength, drawing the two middle distillates closer to parity on a crack basis.
Again, the Mediterranean market's continued strength also lent support throughout the quarter, with Cyprus, Greece and Turkey all seen as active buyers for spot cargoes.
Prior to the violence and disruption that has rocked the country, Libya had been producing up to four 30,000 mt cargoes of jet fuel per month, a size favored by Mediterranean discharge locations, and the loss of supply from the turbulent region provided further support to Med values.
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