Oil Traders Jump Into Action as Europe Screams for Diesel Supply

An oil tanker sits at anchor off the coast of the United Kingdom. (Chris Ratcliffe/Bloomberg News)

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Traders are snapping up ships to haul millions of barrels of diesel westward from Asia and the Middle East as oil supply chains react to Russia’s invasion of Ukraine.

Bookings to fill oil tankers with refined fuels — mostly diesel, gasoil and jet fuel — and sail them from East to West have soared in recent days, according to a ship broker and a large vessel owner. Supply chain chaos created by the war has boosted Europe’s diesel price to a record high, helping to make it profitable for traders to ship to the continent from the Middle East.

“We see Arabian Gulf to Europe opening right up on gasoil and jet fuel as well,” said Per Heilmann, head of freight trading at Maersk Tankers A/S, which manages at least 230 fuel tankers. “The market pricing is saying bring the lost supply to Europe from elsewhere.”

Europe is heavily reliant on diesel imports and Russia is by far its single biggest external supplier. The country’s invasion of Ukraine has caused widespread disruption to the continent’s supply chain, perhaps most notably in driving Shell Plc to promise run cuts at some of its oil refineries, as well as a huge increase in shipping costs from the Baltic to northwest Europe.

Weekly bookings to ship clean petroleum product out of the Middle East or India — with the West as the primary destination option — have surged to 29 tankers hauling a combined 1.68 million tons, more than double the year-to-date average, according to Richard Matthews, director of consultancy and research at E.A. Gibson Shipbrokers Ltd. Indeed, the latest week’s data is not yet even complete; so far, more than half of these ships are thought to be for jet or diesel-type fuel.

Oil tanker owner Torm A/S also recently estimated that 25 large tankers have been booked to haul refined products — mainly diesel and jet fuel — from East to West over the past week. That is “three times higher than the volume we have seen in recent months.”

The wide difference in forward diesel prices between Europe and Asia suggests the market expects Europe to lose a chunk of its gasoil supply from Russia, according to Anoop Singh, regional head of tanker research at Braemar ACM Shipbroking.

Supplies may also be cut by “European merchant refiners who may dial back runs in the face of firm product cracks but poor margins from rocketing natural gas prices,” he said.

Stockpiles of diesel in Europe’s oil trading hub of Amsterdam-Rotterdam-Antwerp were already at a record low in early February, according to Genscape data. Although they rose in subsequent weeks, they’re likely to tighten again because of curbs at two key Rotterdam refineries: Shell Pernis and BP Rotterdam.

Meanwhile, the continent’s futures market is signaling an extremely tight market for diesel — albeit less extreme than earlier in the week — with traders earlier on March 11 willing to pay about $40 a ton more for the exact same stuff to be delivered one month sooner. The structure, known as backwardation, also weighs on the economics for importing fuel.

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“You have very low inventories,” Heilmann said. But we’re not at tank bottoms and there is potential to bring incremental barrels, especially from the U.S. Gulf and Arabian Gulf, he said.

Ensuring a high-volume, steady stream of resupply to Europe from Asia could be tricky. China’s state-owned oil refiners are likely to cut fuel exports next month and Saudi Arabia, a major diesel supplier, has issued a large import tender. However, India’s Reliance is planning to increase shipments of diesel to Europe.

U.G. Gulf Coast refiners have not yet ramped up diesel shipments to Europe. Current domestic prices are too high for this to make economic sense for most exporters — Latin America remains the priority for Gulf Coast producers.

On the Russian side, bookings for ships loading clean petroleum product — a category that includes diesel — out of both the Baltic and Black Sea have fallen sharply, according to Gibson. The U.K. has said it will phase in a ban on Russian oil, including diesel, over the rest of this year.