NWE diesel arrivals from China falter after high times

The amount of Chinese diesel and gasoil arriving in northwest Europe has dropped sharply from the unusually high levels seen between June and October, but faltering demand in China could see the region's imports rise again before the end of the year.

China unleashed an unseasonably large wave of ultra-low sulphur diesel (ULSD) and gasoil cargoes to northwest Europe, including to the Amsterdam-Rotterdam-Antwerp (ARA) trading hub, in the past few months. Between 15 June and 11 October 325,000t either discharged or was in transit, just 13pc less than in the 2016-19 period.

It was attracted in by very workable economics. The gasoil east-west spread — the difference between Asian and European gasoline prices and a key indicator of the arbitrage possibilities between the two regions — had front-month Ice gasoil futures at a $43.60/t premium over the front-month Singapore gasoil swap in the period. The Ice gasoil premium was $8.12/t in the same time a year earlier.

The 10ppm ARA cif contract price was notable elevated during June and hit $1,382.50t on 15 June, when Vortexa data show the first 2022 cargo left China's Shandong Lanshan terminal. This was the third highest outright price this year.

European diesel prices were pushed higher by a number of factors, including concerns about replacing Russian supply and strikes that cut refinery output. Adding to this, middle distillate stocks in the EU-15 and Norway had started to fall in April and by August had reached a 14-year low, according to Euroilstock. Inventories at that point were 17pc lower year on year.

China has more recently slowed diesel and gasoil exports to Europe, partly reflecting a slowing European economy. The S&P Global Eurozone manufacturing Purchasing Managers Index (PMI) fell to 46.6 in October from 48.4 in September, indicative of economic contraction. Opec this week in its November Monthly Oil Market Report noted some economic challenges in OECD Europe that have weighed on oil demand. The slowdown also reflects regional issues in Asia-Pacific. China's top economic planning body, the NDRC, called on state-owned firms PetroChina and Sinopec to prioritise supply to the domestic market in October after a sharp fall in domestic stocks.

But Chinese exports appear likely to rise strongly this month, with market sources and Vortexa data indicating that more than 2mn t of gasoil is on track to leave the country. This could be reflective of slowing domestic demand, with construction sector activity possibly hindered by Covid-19 lockdowns and by falling temperatures in the north.

With the gasoil east-west spread still workable – the Ice contract was at a $21.64/t premium against the Singapore gasoil swap on 14 November – Long Range 2 (LR2) tankers could bring gasoil to Europe, although a larger than normal proportion of China's November exports appear to be staying in the region. Diesel and gasoil movements from China to destinations in Asia-Pacific in the month to date are the highest since July 2021, perhaps to counter a slightly tighter supply situation caused by turnarounds at several key producers, including Taiwan's Formosa Petrochemicals and South Korea's SK Energy.

By George Maher-Bonnett and Cara Wong