Summer surge: Record diesel flows from USGC to Europe, Latin America
The US Gulf Coast is experiencing record diesel flows to Northwest Europe as favorable freight rates and strong refinery production boost the Transatlantic trade.
As summer ends, diesel flows from the USGC to NWE and the Mediterranean are reaching unprecedented levels. In July, the USGC-NWE/Med diesel trade hit a record with 10.6 million barrels transported across the Atlantic and August surpassed that figure with 12.5 million barrels
This comes as Brazil struggles with fluctuating diesel imports amid a summer fuel frenzy. Russia has been the primary supplier to Brazil since 2022. However, the USGC has strengthened exports to Brazil in the summer months. Despite the surge, market sources caution that the USGC’s rise may be temporary, as local demand in Brazil shifts. Russian diesel continues to dominate the Brazilian diesel market, accounting for over three-quarters of Brazil’s imports.
Factors driving record volumes
Clean tanker freight rates have significantly influenced the USGC-NWE/Med trade flow. After experiencing volatility, rates dropped from a peak of $57.99/mt in June to around $30.30/mt in August, S&P Global Commodity Insights pricing data shows. As freight rates fell, the arbitrage opportunity to transport diesel became more attractive, prompting charterers to book vessels quickly, which in turn tightened available tonnage and led to rising freight rates, hence the volatility.
Additionally, strong refinery utilization rates in the US have bolstered production. Averaging 93% since early June, Gulf Coast refineries have been particularly robust, with production peaking at nearly 3 million b/d in early July. This has contributed to elevated US diesel inventories, averaging 112.9 million barrels year-to-date in 2024.
Imports from the UGSC to Brazil jumped from 300,000 barrels in February to 1.7 million in August, marking the highest export volume since 2022. “We’re starting to see purchases from USGC showing up in the lineup again,” a market source said.
Russia is still the main importer, making up over three-quarters of Brazil’s imports. In August, Russian diesel exports plummeted to a four-year low, with only 113,000 b/d making their way to Brazil.
Interestingly, total Russian diesel outflows are on pace to average 621,000 b/d during the 2024 summer, the lowest since July 2020. Brazil is still lifting its usual share of 19% of Russian diesel exports. But as the all-origin discount to US-origin ultra-low sulfur diesel cargoes arriving at the Brazilian port of Suape narrowed from an average of $6.19/b in the first half of the year to $4.36/b in the second half, it’s clear that competition is heating up.
Domestic opportunities
One side effect of the high USGC production levels has been limited domestic arbitrage opportunities due to low diesel prices in the Gulf and Atlantic Coast. Arbitrage involves taking advantage of price discrepancies for the same commodity in different regions. Traders buy the commodity at a lower price in one market and sell it at a higher price in another, profiting from the difference.
In mid-August, the Gulf Coast ULSD differential was assessed at an 11.40 cents/gal discount to NYMEX futures, the lowest since January. Atlantic Coast diesel was also weak, reaching a two-year low on Aug. 13 at a 5 cents/gal discount to the NYMEX futures. Despite the more than 6 cents/gal difference, shippers on the pipeline have additional costs that closed the arbitrage opportunity to move diesel between the two regions.
Despite the USGC increases in Brazil, market sources warn that this surge is just a “prompt movement.”
However, the broader Brazilian refined products market is growing. Retail sales of refined products rose to 6.05 billion liters in July, up from 5.67 billion liters in June, according to Brazil’s National Petroleum Agency. Diesel retail sales in the first half of the year rose by 4% to 38.55 billion liters, indicating that even as the fuel market shifts, demand is on the rise.
Looking ahead
As we enter the fall refinery maintenance season, the export volumes out of the US Gulf Coast are expected to decline as refineries taper off their diesel production. Compared with the summer where exports volumes set a record, the fall should fall back in line with seasonal norms. This summer was abnormal as one US refined products trader noted, “The volumes out of the US Gulf Coast are just massive.”
Meanwhile, Russian seaborne refined product exports are expected to increase as countries are preparing to get ahead of refinery maintenance season. Russia loaded 2.37 million b/d of refined products in the week ended Sept. 6, a six-week high. Meanwhile, Russian product is offered at a discount of 7 cents/gal to the USGC diesel, making it a tempting option for Brazilian buyers.
Analysts project Brazil’s GDP to rise by 2.2% this year, which may boost diesel consumption. A market participant recently noted that each percentage point of GDP growth is equivalent to about a 34% increase in gasoline and diesel demand.
Platts is part of Commodity Insights.
Source: Platts