ARA 50 ppm gasoil at seven-year high vs 10 ppm ULSD in low driving environment

New York — With COVID-19 seeing Europeans stay at home with their heating on and cars parked, S&P Global Platts assessed ARA barges of 50 ppm gasoil at a $2.50/mt premium to ARA barges of 10 ppm diesel Thursday, the highest since June 2013.

Sources attributed this unusual price inversion to the coronavirus pandemic, which has both decimated driving demand in Europe and also boosted demand for heating oil as people spend more time at home and less time driving, depressing prices and whetting buying appetites in a contango market.

One source based in France said demand for heating oil in ARA seemed to be above that of ULSD, which has led to the lower sulfur product being downgraded into heating oil.

"We still have very strong demand for heating oil. We cannot fulfill all of it as the 0.1% gasoil market is rather tight, so we buy a lot of ULSD that we downgrade into FOD," a he said Thursday, referring to Fioul Domestique, which is the French name for 0.1% gasoil used as heating oil.

In practice, this downgrade takes place by transferring product from a ULSD tank into a heating oil tank and adding a red dye. According to the trader, the boost in heating oil demand was mostly due to the low outright price environment.

Another market source with customers in Germany and Switzerland had a similar take on the situation, saying that more heating oil barges and fewer ULSD barges appeared to be selling into those markets.

"This makes sense" as coronavirus lockdown prevent people from driving even as residences continue to be heated, he said.

Moreover, less ULSD could now go into the heating oil pool due to the switch to summer spec diesel -- with less stringent cold properties -- around April 15, even if, according to market participants, some ARA refineries were continuing to produce intermediate spec.

In March, a lot of ULSD had made its way into the 50 ppm gasoil pool in Germany and Switzerland, but many traders expected that phenomenon to be less prevalent in April due to the change of specification.

With the spec change in mind, it seemed as if the ULSD-gasoil price inversion could continue in coming weeks, so long as travel restrictions prevented Europeans from driving, creating a glut of road fuel in storage.

"There are some people who are asking to go from Med to NWE as there is more storage in NWE [for diesel fuel]... there are cargoes still coming from the East and you have nowhere to put them in the Med," he said.

Indeed, European ULSD storage tanks have become so bloated, market sources have said that floating storage on clean tankers has become increasingly viable. "Officially there is zero tons of diesel in floating storage but in reality there is more and more," a trader said Wednesday.

Moreover, research from S&P Global Platts Analytics said: "The coronavirus...has managed to bring about the deepest global recession since the Great Depression."

All else being equal, ULSD consumption tends to have a closer correlation with GDP growth than 50 ppm gasoil or 0.1% gasoil used a heating oil. In a recession, ULSD demand takes a hit from weaker industrial activity and tourism.

By contrast, 50 ppm gasoil demand is less correlated with GDP growth as individuals tend to heat their homes irrespective of macroeconomic conditions.

While ULSD demand tends to be more sensitive than gasoil to changes in economic growth, it is also true that demand for heating oil -- 50 ppm gasoil or 0.1% gasoil depending on the country -- is typically more price elastic than demand for diesel as a road fuel all else being equal.

Platts data showed Thursday's 50 ppm gasoil premium to ULSD was the widest since June 26, 2013, when the spread was assessed at $3/mt.