Cold Snap has European Traders Eyeing Diesel Exports to US

Diesel and heating oil exports will increase to the United States from Europe, traders said, reversing the usual flow, as refineries on the U.S. East Coast struggle against extreme cold that has partly frozen the Delaware River.

 

On Friday New York heating oil's premium to European gasoil spiked to its highest level since the January 2014 'polar vortex', as temperatures dropped as low as -18 degrees centigrade (-0.4 Fahrenheit), knocking a number of key refineries offline.

 

Traditionally the United States has sent diesel to Europe, where the fuel is much more commonly used in cars, while European refiners have sent excess gasoline cargoes across the Atlantic.

 

A so-called 'reverse-arbitrage' trade has been underway since the start of February as a cold snap on the U.S. East Coast boosted prices, with the region still a heavy-user of heating oil. Dealers said the latest refinery problems may extend the length of time the trade works.

 

"It opens up a reverse arb to the United States," one distillates broker in London said.

 

"It would obviously work for front-month heating oil futures, but more importantly given the time needed to deliver, it works against the second month contract too."

 

Delta Air Lines' 185,000-barrel-per-day refinery in Trainer, Pennsylvania has been forced to cut back production due to severe cold weather, while Philadelphia Energy Solutions has also had problems, the company said on Friday.

 

Both plants normally draw water from the Delaware river for cooling.

 

The premium of U.S. heating oil futures for March delivery over London-traded ICE gasoil futures jumped to a 13-month high of 27 cents on Friday, with the spread <HO-LGO1=> at the widest since January 2014.

 

The spread between New York heating oil and London-traded gasoil for delivery in April rose to almost 10 cents a gallon, the highest since January.

 

Cargoes are also being drawn to the United States from further afield, with a distillates cargo from the newly opened 400,000 barrel per day Yasref refinery in Saudi Arabia also on its way to New York, traders said earlier this week.

 

The 55,000-tonne cargo of 10 ppm diesel aboard the BW Kronborg is expected to go into the heating oil pool, traders said.