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Supply issues underscore strong year for Europe's diesel market

By Sophie Byron in London

January 14, 2013 - The year began with independent refiner Petroplus announcing its insolvency on January 24, leaving a question mark over production of some 580,000 b/d of European refining capacity at the company's five refineries.

The diesel barge crack, or the product's value versus Dated Brent crude, initially drew support from the closures with other refineries increasing runs on the back of improving margins.

However, the contrary influences of weak economic data and climbing crude values meant end-user demand remained erratic and subdued, resulting in the 10 ppm FOB Rotterdam barge crack falling to a 19-month low of $11.17/b by March 3, down $9.71/b from January 10, according to Platts data.

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The higher crude prices also supported outright diesel prices, the CIF Northwest Europe cargo value reached $1,072/mt on March 19, the highest level since August 21 2008, when it was assessed at $1,088.50/mt, Platts data shows. This was despite the cargo premium to the ICE gasoil contract struggling to cross the $30/mt mark.

However, unlike in 2008, the euro has struggled on international currency markets, exacerbating high retail prices for European consumers.

The spring refinery maintenance season nudged the diesel market into backwardation with further support coming from a drop in Russian Baltic 10 ppm diesel exports as upgrade work at Russian refineries sharply reduced supply to NWE at the start of the second quarter.

The sustained period of structural backwardation on the key distillates 0.1% gasoil contract saw diesel stocks drawn down.

ULSD 10ppm Cargoes CIF NWE Swap ($/mt): October 1 - December 31, 2012

A legacy of the Petroplus loss was the closure of the 220,000 b/d Coryton refinery in the UK in June, which saw the Thames focus on imports, with additional flows of 200,000 mt/month heading into the location.

Refinery maintenance, backwardation hits cradle of European ULSD supply

Against that backdrop, low stocks and emergent import centers, the second half of 2012 saw the NWE diesel market return to strength as lower prices sparked German demand, while maintenance season and further unforeseen interruptions to supply pushed the diesel crack to levels not seen since 2008.

Through May the FOB Rotterdam 10 ppm barge outright price fell $167.25/mt while in June barge prices reached an 18-month low of $830/mt.

The ICE 0.1% gasoil futures structure held in backwardation even as demand began to soften at the end July, leaving only limited stocks in tank for any future supply disruptions.

Before the onset of the autumn maintenance season two unforeseen factors brought support to both NWE and Mediterranean diesel cargo premiums.

In late August, a fatal explosion and fire at the 650,000 b/d Venezuelan Amuay Bay refinery took the facility off line and, soon after, Hurricane Isaac hit the US Gulf Coast.

The temporary closure of USGC refining capacity lent support to a European diesel market which depends on the US flows to meet the shortfall in local production.

A heavier-than-usual fall refinery maintenance period in NWE and turnarounds in the US and Russia accentuated the effect and took barge and cargo premiums to near 12-month highs.

Total's Gonfreville refinery in France, Shell's Pernis refinery and BP's Rotterdam refinery all had maintenance and upgrade work affecting some 1.2 million b/d capacity between the three locations.

In addition the UK saw its total 1.7 million b/d refining capacity nearly cut in half, necessitating the demand for increased imports as at least three of its seven remaining refineries went into maintenance.

In the second half of October, concerns over production at a number of German refineries and low stocks saw the 10 ppm diesel barge market assessed above the CIF cargo market.

New capacity, poor demand drives split between NWE, Med premiums

The start of refinery maintenance season in Europe also saw a divergence in the Med and NWE cargo premium. From September 6 to December 20 the Med CIF cargo premium had priced at a discount to the ULSD CIF NWE basis ARA cargo premium.

That contrasted with the beginning of the year, when the Med CIF cargo value was consistently assessed at a premium to the NWE cargo value for most of January, February and March.

The NWE CIF basis ARA cargo value was assessed at a $31.75/mt premium to the Med market on November 11, while the Med reached a premium of $11/mt to the NWE basis ARA cargo value March 15, Platts data shows.

The marked strengthening of the NWE market through the third and final quarters opened a diesel arbitrage, with the NWE strength coming just as new refining capacity came online in the Med.

Over October 2012, Spanish refiner Repsol sold 11 diesel cargoes in the Platts Market on Close assessment process, with some making their way into west and north France.

Hellenic Petroleum's upgrade of its Elefsis facility was completed in the second half of the year. The company said that nearly half the refined products would head into the export market, with traders putting the volune of diesel exported per month at almost 200,000 mt.

Meanwhile 10 ppm diesel flows from the Black Sea picked up over the second half of the year, with Lukoil trading arm Litasco increasing its export volumes to around 180,000 mt/month.

The change in supply has come as Russia moves away from higher sulfur production towards ever greater volumes of low sulfur diesel, heralding a trend that is likely to pick up through 2013 and beyond.

While Spain, Greece and Israel have upgraded their refining networks, Italy has seen closures of several refineries, with others being shut for long periods of time for intensive improvements.

The loss of refining capacity in Italy raises the probability of Italy becoming a bigger importer of diesel in 2013.

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