European diesel and jet fuel refining margins hit their widest in over two years on 18 November, following an unexpectedly strong rally in Ice gasoil futures.
The premium of diesel cargoes on a fob ARA basis against benchmark North Sea Dated crude rose by $4.83/bl on the day to $43.64/bl on 18 November, the highest since January 2023. The premium of jet fuel cargoes on a cif northwest European basis against North Sea Dated rose by $3.87/bl to $41.19/bl, the highest since September 2023. Outright prices for both products were the highest for five months.
This came after Ice gasoil futures — the underlying value in Argus' European middle distillate assessments — firmed significantly. The front-month contract settled at $777.50/t, surging by $33.75/t or 4.5pc on the day.
Market participants pointed to tight supplies that have been supporting margins in October and November. Diesel supply is particularly pressured, they noted, with fewer barrels on the water heading for Europe. Supply tightness has persisted for some weeks, with middle distillate cracks holding above $30/bl since 23 October.
Middle distillate loadings for the EU, UK and Norway fell to an eight-month low in October of just 5.41mn t, according to Kpler, dropping by more than 30pc on the month. The arbitrages for diesel towards Europe from the US and Mideast Gulf held shut for most of October, according to traders.
Heavy refinery maintenance in recent weeks has also tightened middle distillate supplies. Over 800,000 b/d of crude distillation capacity was offline in Europe over the past month, according to Argus tracking, but that peak has probably passed. Turnarounds in the Middle East and Asia-Pacific have weighed further on global supply.
The backwardation in Ice gasoil futures — where prompt prices are at a premium to future prices — also steepened sharply on 18 November. The front-month contract settled at a $43.25/t premium to the second-month, wider on the day by $13.75/t. That premium has averaged $30.27/t so far this month, the highest monthly average since October 2022, if sustained until the end of November.
The steep backwardation is likely to have incentivised firms to draw physical stocks down to very low levels, as gasoil unnecessarily left in tanks loses value quickly in a backwardated market. Diesel tanks are almost dry in ARA, and were drawn down more this week, according to market participants today. The backwardation also harms arbitrage economics, particularly for cargoes heading to Europe from the Mideast Gulf via the Cape of Good Hope.
But several participants said middle distillate margins have risen beyond levels supported by fundamentals, and that supply constraints are not sufficiently severe to sustain values at current levels. This may explain why the Ice December gasoil contract fell by $11.25/t today to $768.25/t, although it traded as high as $804.50/t earlier in the day.
