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Market spreads and futures prices signaled at the end of this week a tightening in the European diesel market, on the back of closed or restricted arbitrage opportunities for supply from both the United States and the Middle East.
The prompt gasoil futures on the ICE exchange jumped to a premium over the next-month futures contract intraday on Friday, from a discount at Thursday's close, according to data compiled by Bloomberg.
This market structure, backwardation, suggests increased immediate demand for a commodity compared to volumes for delivery further out in time.
Moreover, the premium of ICE gasoil to Brent Crude, known in the industry as the crack spread, jumped to $21.02 per barrel on Friday, the highest intraday level since the middle of April, per Bloomberg's data.
ICE gasoil spreads and cracks have gained this week, on the back of the continued closure of the arbitrages from the U.S. Gulf Coast to Europe, primarily due to high USGC freight rates, James Noel-Beswick, an analyst at Sparta Commodities, wrote in a note earlier this week.
In addition, marginal diesel arbitrages from the Arabian Gulf and the West Coast of India continue to point East, the analyst noted.
"This dynamic suggests that the bullish trend in European diesel prices is likely to persist until the USGC TA arbitrage reopens," Noel-Beswick said.
Part of Europe's recent market strength in middle distillates can be attributed to "the robust jet market," the analyst added.
Strong jet fuel demand in Asia is expected to continue keeping the arbitrage window to Europe closed for an extended period, and as a result, European jet differentials and spreads are set to remain strong into the medium term, according to Sparta Commodities' Noel-Beswick.
Jet fuel demand is rebounding globally as people have shaken off the pandemic years and are traveling en masse again.
The rebound of air travel is driving global oil demand growth, analysts say.
By Charles Kennedy for Oilprice.com
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