FEATURE: Deep freeze, heat wave roil Western Hemisphere distillate markets

As US refineries recover from cold weather-related outages, a summer heat wave in Latin America has caused a strain on power grids and increased high sulfur diesel demand for power generation, highlighting the push and pull of distillate dynamics throughout the Americas in February.

In the first week of the month, a winter storm moved through the US Gulf Coast, resulting in reported power outages at several facilities, bringing unplanned outages for the region to 1.08 million b/d.

News first broke on Feb. 7 that operations at Marathon's 585,000 b/d Galveston Bay, Texas, refinery were disrupted due to a hydrochloric acid leak following a cold shutdown, according to market sources, though a Marathon spokesperson declined to comment.

The same day, market sources reported that Valero had also experienced an outage at their facility in the area, the 225,000 b/d Texas City refinery. Shortly after, Valero's 205,000 b/d Houston site was reportedly forced to shut all units due to a utility power outage on Feb. 7. A spokesperson for the San Antonio-based refiner also declined to comment.

Following the reported trifecta of outages on Feb. 7, benchmark distillate differentials leapt on the back of activity in the spot market. Jet fuel barrels for Colonial Pipeline's ninth cycle traded at NYMEX March ULSD futures minus 11.75 cents/gal in the Platts Market on Close assessment process, with the 1 cent/gal boost propelling the differential past a one-year high. The outright price fell nearly a cent on the day, backing off from the seven-year high of $2.7597/gal established in the prior session. Valero was the buyer on five out of six deals for 125,000 barrels worth of product.

Ultra low sulfur diesel barrels in the region were reported to have traded flat to March futures that same day, marking a four-year high before softening later in the MOC assessment process. The outright price ended the day at $2.9379/gal, falling 1.87 cents from the previous session's eight-year high of $2.8566/gal.

While the turnaround timeline for Gulf Coast refineries remains to be determined, differentials for both benchmark differentials softened slightly as the week progressed, despite contrasting news on respective stock levels.

US Energy Information Administration data released Feb. 9 showed Gulf Coast jet stocks rose to 12.44 million barrels in the week ended Feb. 4, slightly above the rolling four-week average, while ULSD stocks remained 429,000 barrels below the four-week moving average.

Deals in the paper market have shed some light on values in the coming weeks. As of mid-week, the balance-month swap for jet fuel had traded at minus 17 cents/gal while the March swap traded at minus 17.75 cents/gal, according to the Chicago Mercantile Exchange. At the same time, the ULSD balance-month swap traded at minus 5 cents/gal while the March swap was done at minus 4.75 cents/gal.

Blistering heat wave spurs Argentina tender volumes

Below the Equator, distillate traders grappled with the fallout from a different weather event: a heatwave in Argentina that strained the supply of generating fuels.

On Feb. 1, S&P Global Platts learned of a sizeable tender from Argentinian wholesale power administrator, Cammesa, following a mid-January heat wave in the country that made headlines worldwide. The tender called for 900,000 cu m, or 5.66 million barrels, of high-sulfur diesel that will be used to run the country's thermal power plants.

Cammesa requested 100,000 cu m, or about 630,000 barrels, of product to be delivered in February with the remaining volume expected to be delivered by April.

Cammesa bought cargoes from six entities, with market sources reporting six went to Shell, between four and five to Gunvor, between two and three for Chevron, two for Trafigura, two for Phillips 66 and one for Vitol.

The price averaged a 6-cent premium to an average of the NYMEX May ULSD futures contract, with contract dates depending on the loading period of a cargo.

Argentina scaled back imports of fuel oil for power generation in 2019 to focus on increasing domestic gas production and renewable power capacity, although it has brought in regular high sulfur diesel cargoes for power generation, which are cleaner than fuel oil. This most recent tender, however, marks the largest volume of high sulfur diesel that Platts has seen from Cammesa. Sources said other countries from Colombia to Chile are out buying ULSD and other distillates despite high prices.

"Although LatAm is a flat price buyer, they are also short and need the product, so it becomes an inventory management strategy," said one trader based in Latin America. "If you look at storage in Latin America, you will find it is very limited. There's not much room for error or faulty units."

Power generation needs are significant drivers of distillate tenders the likes of Cammesa, but entities are having to look to Europe and West Africa as Gulf Coast prices rise.

"It's a tricky scenario with the backward structure," said one trader based in Latin America. "Long haul cargoes are at a disadvantage, yet short hauls are limited. Tricky."