Viewpoint: Colonial diesel arbitrages to stay wide

The diesel arbitrage from the US Gulf coast to the northeast is poised to remain wide through January as Gulf coast differentials are expected to remain near the three-year lows hit in early December.

The arbitrage to ship diesel from Pasadena, Texas, to Linden, New Jersey, rose to 11.32¢/USG through the first three weeks of December, 5.83¢/USG above the cost of the Colonial pipeline tariff. Arbitrage spread is at its widest level since March 2016.

Ultra low sulfur diesel (ULSD) cash prices have also fallen to 14-month lows, averaging $1.73/USG the first three weeks of December, an 11.45¢/USG drop from the same period last year and the lowest since October 2017.

Part of the weakness on the US Gulf coast comes from an effort to clear taxable inventory before the end of the year. Texas' ad valorem tax tends to prompt a sell-off from Gulf coast refiners, and this year's impact was particularly severe.

But the weakness could persist into the new year as inventories in the northeast remain low, with US Atlantic coast diesel stocks 11.6pc below the five-year average in November with an average of 35mn bl.

Northeast inventories began rising near the end of November and early December, partly because of rising waterborne supplies from the US Gulf coast. Suppliers are turning to more expensive domestic cargoes as overland pipelines reach full capacity.

At least six Jones Act vessels have moved, or will move, distillates from the US Gulf coast to New York Harbor in November and December, each carrying approximately 200,000 bl of fuel. Colonial Pipeline's distillates line has been operating at capacity after sustained allocations since late October.

Wide arbitrage margins have led shippers to pay premiums for space on the allocated Colonial. Distillate line space rose to an average of 4.88¢/USG in the first half of December, the highest levels since June 2015.

But multiple Gulf coast refineries will undergo maintenance beginning in February, which will likely tighten supplies and shrink the northeast arbitrage heading into the spring.

Exports from the Gulf coast could be the wild card going into next year, after record-high freight rates in early December capped movements and helped support Colonial pipeline diesel differentials to three-year lows. Freight rates from the US Gulf coast to Brazil began ticking higher in mid-November, reaching 43.9¢/USG on 6 December, the highest level since Argus began assessing the route in October 2015. The freight rate averaged 39.8¢/USG through the first three weeks of the month, up by 12.73¢/USG from last year's average during that span.

Freight rates from Houston to the east coast of Mexico also reached their highest since 2015 at 13.16¢/USG on 10 December.

Exports of distillate fuel oil as of the week ended 14 December declined by 27pc to 1.3mn b/d since 23 November, according to the US Energy Information Administration (EIA).

A lack of vessels coupled with demand in Brazil have likely pushed the freight rates higher. A coking tower shut down Petrobras' 115,000 b/d Abreu e Lima refinery on 4 December. The refinery is a major supplier of ultra-low sulphur diesel (ULSD), with two thirds of its capacity allocated to the fuel. Petrobras' 415,000 b/d Paulinia refinery in Brazil, meanwhile, has been operating at half capacity since September after an explosion in August. It is expected to reach full capacity in January.

But market participants noted that February Gulf coast refinery maintenance will likely impact the arbitrage for shipments headed to Latin America as well heading into the spring.