[SINGAPORE] Lower prices in Asia for diesel and jet fuel are boosting flows of the products to Europe as traders try to get rid of high inventory, although expensive freight rates are hampering some shipments, traders and shipbrokers said on Wednesday.
At least four vessels have been provisionally booked in July by oil trader Vitol and Aramco Trading Company, a subsidiary of oil giant Saudi Aramco, to ship diesel or jet fuel from South Korea or Singapore headed for Europe, shipping fixtures showed.
The prospects for the east-west flow has helped to drive the premium for diesel to an almost two-month high.
"It looks like the arbitrage is being opened now," a Singapore-based trader, said referring to the profitability of the diesel heading to Europe from Asia.
Until now, shipping diesel and jet fuel from North Asia to Europe has been unprofitable as demand in India and South Korea has been absorbing excess barrels, but the start of monsoon season and the end of summer in the Middle East is starting to build supplies.
The exchange of futures for swaps, or EFS - a contract that gauges the price difference between cargoes loading in Asia and those in Europe - widened to more than minus US$30 a tonne late last week, the largest spread between middle distillate values in the two regions since March.
Last year, the EFS held mostly stronger than minus US$10 a tonne, but a change in sulphur specifications in the ICE gasoil contract from 0.1 per cent, or 1,000 parts per million (ppm), to 10 ppm from early this year could also explain the wider spread, traders said.
For the arbitrage to work, traders say, the spread between Asian and European cargoes typically has to be at least US$20 a tonne, though the economics also depend on freight rates. "Freight in Asia is very expensive right now," a Singapore-based trader said, adding that high rates are limiting some of the flows to west.
Rates for clean tankers have been going up partly due to fuel oil traders converting some of them to store record volumes of fuel oil traded in Singapore last month, shipbrokers said.
Should shipping rates start to weaken, though, traders expect more diesel and jet fuel to flow from Asia to Europe.
Still, distillates stocks in Europe have also been building with refiners capitalising on strong margins and imports from the US Gulf and that may make it difficult for the arbitrage to remain open for long.