More Mideast Gulf and Indian gasoil is to stay east of Suez, as tensions in the Red Sea have made the east-west arbitrage route more unviable.
The Europe-bound route is uneconomical for gasoil cargoes because of higher costs associated with surging freight rates and a longer voyage, traders said, even though prices in Europe have been strengthening relative to Asia, with the EFS spread — or the Singapore 10ppm (0.001pc) sulphur gasoil swap against Ice gasoil futures — falling from -$16/t from 2 January to close to -$50/t as of 25 January.
As clashes in the Red Sea escalated and continued into January, many shipowners are now reluctant to head from the Mideast Gulf-India region to Europe through the Suez Canal, opting to use the longer Cape of Good Hope route instead. This causes freight costs for westbound Long Range (LR) 2 vessels, the vessels most commonly used on the gasoil east-west route, to increase by at least $850,000-1mn.
Rerouting a voyage through the Cape of Good Hope will typically take a couple more weeks more than through the Suez Canal, depending on the discharge port. Shipments from India to the US will take an additional 10-14 days, while shipments from India/Mideast Gulf to Europe/Mediterranean will take 20-25 days. This lengthier voyage is adding even more additional costs, as the gasoil market's steep backwardation, with prompt prices at a premium to forward values, eroding the profitability of longer voyages. given that cargoes lose more value the longer they spend on the sea. The additional days on the sea should add almost $1mn, or more, traders said, in backwardation cost for a typical LR2 size tanker of gasoil.
With such hefty costs involved on this route, Mideast Gulf and Indian cargoes are now increasingly pointing towards east of Suez destinations like Australia or Singapore, in addition to their usual outlets such as Africa, show shipping fixtures. Fewer of these cargoes are headed for Europe.
Indian private-sector refiner Reliance Industries fixed the Torm Kirsten to load a 90,000t (671,000 bl) cargo of ultra-low sulphur diesel (ULSD) on 28-30 January from west India's Sikka to head towards Singapore. BP also placed the NordMarlin on subjects to load a 75,000t cargo of ULSD from Sikka on 2 February to head towards Australia.
The rise in such cargoes is also reflected in preliminary data from Vortexa and trade analytics platform Kpler, which show that Mideast Gulf and west coast India gasoil loadings towards Asia-Pacific are on track to hit a five-month high in January.
Easing tightness
These additional cargoes have helped to ease the temporary tightness in the Asian gasoil market. A further influx of cargoes will also help to resupply Asia-Pacific, particularly with a heavy refinery maintenance season in northeast and southeast Asia to begin in the next two months. Chinese gasoil exports are also expected to be leaner in February, with traders and analysts forecasting exports to range around 700,000t, down slightly from this month's projections of about 800,000-900,000t.
Prices in Asia-Pacific have largely remained stable for now, with Asian gasoil crack spreads remaining around $23/bl for the past week, as the region is not facing fierce enough competition from west of Suez, partly because European buying has been more subdued. Buyers are delaying buying wherever possible, a Europe-based trader said, while prompt supplies are still sufficient in Europe.
But Europe's tightness in supplies should be felt from the latter half of February, said the trader, when the region starts to feel more of a pinch from lower arrivals of Indian and Mideast Gulf diesel.
