Liquidity in the US Gulf Coast ULSD market jumped Wednesday as traders looked to find a home for record-high stocks in the region and export interest continued after an arbitrage to Europe reopened briefly earlier in the week.
Platts assessed Gulf Coast ULSD at NYMEX May ULSD futures minus 6.85 cents/gal, down 60 points/gal day on day for the first day of trading on Colonial Pipeline's 20th cycle.
In the Platts Market on Close assessment process, a record-high 1.15 million barrels of ULSD traded for the prompt cycle. Vitol was selling in 36 of the 46 deals, or 900,000 barrels. The other sellers included Shell, Novum, Northville and ATMI.
Trafigura bought 450,000 barrels, BP bought 250,000 barrels and Astra bought 225,000 barrels in the MOC.
"There's just too much juice," one source said of the heightened selling interest.
Gulf Coast ULSD stocks rose last week by 3.4 million barrels to 47.02 million barrels, the highest on record, according to data released Wednesday by the US Energy Information Administration. The previous record was set in February 2011, when stocks were at 45.22 million barrels.
"Stocks are very high and Padd 2 is also full," a source said. "[X Grade] traded minus 6.75 cents/gal, so with it costing roughly 6 cents/gal to ship from the Gulf Coast to Midwest, that arb is extremely shut."
But export activity has been picking up despite a seemingly closed arbitrage. Export EN590 ULSD was assessed Wednesday at $318.5/mt, with freight at $18.59/mt, while CIF NWE ULSD cargoes were assessed at $333/mt, indicating a closed arbitrage of $5.09/mt.
The arbitrage was open on Monday by about $7.45/mt, and at least four Long Range 1 tankers and six Medium Range tankers were booked on USGC-loading voyages with trans Atlantic discharge options within the last 24 hours, shipping sources said.
In addition, a fifth LR1 tanker -- the BW Clyde -- was heard to be fully fixed by Trafigura to go to Europe from the US Atlantic Coast either carrying high sulfur or low sulfur diesel.
ULSD typically makes up the bulk of oil products that move on the USGC-trans Atlantic route, and while some of the vessels have other discharge options such as into the Caribbean or South America -- also outlets for diesel -- the potential volume heading to Europe is significant at close to 500,000 mt, or more than 3 million barrels.
The volumes booked in the last 24 hours come on top of significant volumes seen over the past two weeks, with the ULSD arbitrage opening and closing intermittently during this period.
"With stocks this high, we need to price down to push the barrels somewhere because tanks are pretty full," one ULSD source said.
SHIPPING RATES STEADY; SOME FIXTURES LIKELY TO FAIL, SOURCES SAY
Trafigura and Vitol have been key charterers on this route, especially in the LR1 tanker market. Vitol has booked at least two LR1 tankers this week for the USGC-trans Atlantic route with laycans varying from April 13-20, while Trafigura has one LR1 on subjects for a Gulf Coast loading, and another two fully fixed from the Gulf Coast and Atlantic Coast -- all headed to Europe.
In the MR market, charterers such as Valero, ST Shipping, Hartree, Vitol and Lukoil have been seen booking vessels with trans Atlantic discharge options this week.
While expectations in the shipping market that rates could firm has improved somewhat after the week started off with vessels sitting prompt on the Gulf Coast, freight rates have stayed fairly steady, with the USGC-trans Atlantic route remaining unchanged at Worldscale 105 basis 38,000 and w90 basis 60,000 mt so far this week.
Export opportunities for ULSD have been brief dating back to March, when the cash differential in the USGC reached minus 11 cents/gal and reopened the arbitrage, only for it to close the next day after a rush of cargo activity.
One source said the high stock volumes will need to keep the arbitrage open for longer.
"I think the arb has to be open for longer. The Midcontinent is coming out of crude unit turnarounds, so will only produce more from here and not pull as much from the Gulf Coast," a source said.
Part of the concern in the shipping market is that with the sheer number of vessels that have been placed on subjects, particularly on the trans Atlantic route, some of the fixtures will fail -- releasing tonnage back into the region.
"I'm not entirely positive about the market ... once things start getting done [fully fixed], then we'll see. There's a lot on subs, but we could see some failures. The opportunity to jump was really yesterday afternoon, but things were still getting done at last done levels in the middle of all that heat. So that kind of flattened the market; took the air out of the bag so to speak," said a shipbroker, noting that while owners were asking for higher than last done levels now, they did not appear that bullish.
"Owners are holding out just 2.5 points higher than last done, at w107.5 [for the USGC-trans Atlantic route]. If things were really all that firm, we wouldn't have three offers at w107.5. It doesn't seem that firm ... maybe if we had offers at w115. What worries people is everyone has the idea that there can't be this much inquiry. There's five LR1s on subs and however many MRs on subs. Something's going to fall through."
On Wednesday, little was heard in terms of fresh USGC-trans Atlantic cargoes, except some outstanding requirements from the day before getting covered, including Hartree's April 11-13 USGC-trans Atlantic cargo on the Torm Titan and Vitol's April 14-16 cargo on the Dong-A Triton, both at w105.
The drying up of USGC-trans Atlantic inquiries Wednesday came after USGC ULSD prices lagged the fall in NWE cargo prices Tuesday -- narrowing arbitrage opportunities.
