The increase in freight rates for diesel from the Gulf of Mexico to Europe has led to the closure of the import window for this fuel. Currently, the rates for diesel shipments from the Gulf of Mexico have risen to over 400 global units, while this rate was around 250 global units in early September. This increase in rates has limited the ability of third parties to buy and sell diesel profitably.
Economic Variables and Market Impact
Diesel arbitrage refers to the difference between the cost of delivering diesel from a port of origin and the price that the buyer pays at the destination port. When the selling price is lower than the unloading cost, this arbitrage closes, and buyers cannot sell the shipment profitably. Currently, all shipping origins for diesel entering Rotterdam in November are in a negative position. This price gap varies from about $1 per barrel from the Gulf of Mexico to $60-70 per ton from the West Indian shores.
Market Performance Analysis and Diesel Flows
Currently, despite prolonged conflicts in the Middle East, crude flows have returned to normal. The current seven-day average is around 24 million barrels per day, which is an increase from the pre-war level of 23 million barrels per day. However, product exports from the Persian Gulf are still about 50% lower than pre-war levels, and waterways remain at risk. Brent crude prices for December are trading below $110 per barrel, and ICE diesel prices for November have reached about $1477 per ton.
Other factors have also contributed to the closure of the diesel import window from the United States to Europe. From early September to early October, buyers were able to pay any freight rate for diesel from the Gulf of Mexico to Europe and still make a profit. However, with rising costs, this arbitrage closed, and selling prices also decreased. These changes were due to the release of new news regarding the easing of sanctions against Russia and the release of strategic reserves in the United States.
Implications for Traders and Decision-Makers
Timing is crucial in this market. Loading for delivery in January requires loading in Houston in mid-December. Additionally, European demand for diesel is currently weak. Refiners have shifted towards producing distillates, and demand has decreased. Therefore, the net balance in Northwest Europe is above its seasonal range. However, inventories have decreased and need to be rebuilt.
Ultimately, diesel flows to Europe from India have decreased during certain periods and then increased again. These changes reflect the profound impact of economic factors and political decisions on the diesel market and trade flows.
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