Diesel arbitrage: why freight has shut the Europe import window

Freight, not relative diesel prices, has closed the US arbitrage into Europe. Rates for prompt US Gulf Coast cargoes have climbed from around 250 to over 400 worldscale, closing the arbs, before settling lower in recent sessions to come closer to an equilibrium. That does not mean supply stops. Supply is being pulled by relative economics, and we need to look at both sides of the import/export coin to determine where flows will move.

What is the diesel arbitrage, and why is it red? The diesel arbitrage is the difference between the delivered cost of a diesel cargo from an origin port and the price a buyer will pay at the destination. When the sale price is below the landed cost, the arbitrage is closed, and a third party cannot buy, ship and sell the cargo at a profit.

For November arrivals in Rotterdam, every origin on the board is currently negative. The gap ranges from small (US Gulf Coast, around $1/bbl closed) to wide (West Coast India, roughly $60-70/t closed) or even ultra-wide (Ulsan, around $150/t closed). Diesel is a near-global commodity, so the comparison is origin port against origin port rather than grade against grade.

Market context: a long conflict and a lopsided barrel Almost eight months into the Middle East conflict, headline crude flows have recovered. The seven-day average is around 24 million b/d, against a pre-war baseline of 23 million b/d. Products have not followed. Exports from the Gulf are still about 50% below pre-war levels, and waterways remain contested, with 18 vessels attacked in an 11-day window.

This story was originally published by Hellenic Shipping News. Read the full story at Hellenic Shipping News →