Sluggish demand and oversupply sap European diesel markets

European diesel futures spreads are flashing signs of oversupply and slow demand with the three-month contango LGOc1-LGOc4 trading on Monday at its widest since August 2021.

Contango is a market structure in which a current contract trades at a discount to a contract for a later date and usually gives traders a signal to store the fuel to maximise profit.

On Monday the May low-sulphur gasoil futures contract LGOc1 traded at $6.25 a metric ton below the August contract and more than $3.50 below the June contract. The May contract flipped from backwardation into contango late last week.

Europe’s is one of the world’s biggest consumers of diesel, a fuel used in transportation, farming and industry, and relies on imports from the United States, Asia Pacific and the Middle East to supplement local production.

The diesel paper market had been trading in backwardation for most of the time in the past three years as two major global events – the loss of imports from Russia because of Western sanctions and Red Sea disruptions – led to supply tightness.

“Diesel market looks weak with not much demand and quite some oil on offer,” said a trading source who is active in the Mediterranean market.

He added that rising flows into the region from Asia Pacific, the United States and the Middle East were also weighing on values.

Benchmark European diesel barge refining margins ended last week at an 11-month low of about $16.60 a barrel.

A second trader said that mild winter weather in Europe, which weighs on demand for heating oil, is weighing on prices.

“Supply is now overwhelming,” he added.

Imports of diesel and gasoil into the European Union and Great Britain reached 1.07 million barrels per day (bpd) last month and are on track to rise to 1.1 million bpd in April, Kpler data shows. In January imports hit a six-month high of 1.24 million bpd.
Source: Reuters (Reporting by Ahmad Ghaddar and Robert Harvey, Additional reporting by Alex Lawler, Editing by Toby Chopra and David Goodman)