The near-term supply shortage of ultra low sulfur diesel in Northwest Europe has forced up the forward curve backwardation to an 11-month high, and prompted the barges and cargo swaps to trade at the narrowest spread since October 2013, Platts data shows.
The backwardation on ULSD barge swaps opened up to $7.75/mt Friday, the widest balance month-front month spread since May 2013. Similarly, the backwardation on CIF NWE cargoes came up to $6.50/mt Friday, also the strongest since May last year.
After the structure on barges and ULSD cargoes switched to backwardated from contango in mid-March, this prompted many to reduce their stocks in ARA, with some traders selling into the Mediterranean.
"The backwardation [since mid-March] meant that everyone emptied stocks out," one European trader said. "So demand is now coming back, and if resupply is a bit shaky, then the market can perform."
Middle distillate stocks in ARA are at record lows with gasoil stocks well below the five-year-average, according to a report released by French bank BNP Paribas published Friday.
"A few years back this would have meant a bull-run, but now resupply is quicker than before... when the US comes back then they'll push a lot of tonnes Europe's way."
Indeed, estimates from trading and shipping sources place US Gulf Coast to Europe exports at 1.4-1.6 million mt for April, higher than many had expected at the start of the month. As a result of these supplies due to arrive, today's strong backwardation is unlikely to be maintained, according to traders.
"I think [the backwardation] will ease as soon as the US starts its deliveries," a European paper trader said, after concurring that the short-term supply shortage was the main factor for the spike in balance month numbers.
As a consequence of the stock-emptying in ARA to southern Europe, the barge market to Europe's northern canal markets is trading on paper at a six-month-high. The discount for barge trade to NWE cargo trade in the balance month is now only $1.25/mt. Furthermore, the balance month NWE ULSD cargo swaps were trading higher than the Mediterranean ULSD cargoes for the first time in two months.
Monday trade on the balance month strips for either ULSD swap market was slower in the morning. May strip trades on the ICE Block was also thin, but the few cleared trades were slightly up for CIF NWE, but weaker for ULSD barges.
