By Shariq Khan
NEW YORK, March 18 (Reuters) – Demand for U.S. distillate fuel storage tanks has more than tripled since the start of the Iran war, as traders wager that a surge in European and Asian prices will bolster U.S. exports of diesel, jet fuel, and other distillates, storage broker Tank Tiger said.
The Israeli-U.S. war with Iran has choked shipping in the Strait of Hormuz, through which a fifth of global oil supplies flow. Distillate fuel markets have been most severely impacted by the resulting slump in Middle East oil exports, as refinery issues around the world had kept them in tight supply in recent years.
The distillate fuel shortfall is reverberating through the global economy: surging jet fuel costs have forced flight cancellations, and skyrocketing diesel threatens to raise prices for everything from food to furniture.
Weekly bids for distillate fuel storage in the U.S. on Tank Tiger’s platform have risen 242% to 1.3 million barrels so far this month compared to February, the storage broker’s Chief Operating Officer Steven Barsamian said.
The surge is concentrated in the Texas and New Jersey export hubs, showing traders are positioning for international buyers to keep seeking U.S. distillate fuels for a while, he said.
“This is the clearest physical-market signal yet that traders are positioning for sustained Hormuz disruption,” Barsamian said.
The supply crunch pits Europe in competition for U.S. distillate fuel supplies against Asia, as both regions have been hit hard by the loss of Middle Eastern supplies. U.S. refiners have even begun shipping distillates to Asia on a rarely used U.S. Gulf Coast to Australia route, Reuters earlier reported.
“As Middle East flows remain disrupted and freight costs rise, U.S. barrels are becoming the marginal supply for the global distillate market,” two brothers Shohruh and Bekzod Zukhritdinov, who are independent oil traders based in Dubai said.
EUROPE DISTILLATE PRICES NEED TO RISE
The competition for U.S. supplies follows a heavy drawdown from the country’s own inventories for heating and power generation during a harsh winter in the price-setting Northeast region.
U.S. East Coast distillate fuel stocks stood at 27.6 million barrels last week, 18% below the five-year average for this time of the year, U.S. government data showed. Total U.S. distillate fuel stocks were 3% below the five-year seasonal average, the data showed.
Tightness in the U.S. East Coast is pulling more barrels there than Europe, while demand for U.S. Gulf Coast exports in Asia is also driving strength in U.S. distillates pricing, said Alex Hodes, director of energy market strategy for brokerage StoneX.
The April HOGO swap, which reflects the difference between U.S. distillates benchmark ultra-low sulfur diesel and European counterpart ICE gasoil, widened from 18.5 cents a gallon on February 26 to 31 cents a gallon on Tuesday, according to Sparta Commodities data.
European pricing may have also been loosened temporarily by the International Energy Agency’s record release of oil stockpiles, which is expected to include distillates in Europe, Hodes said.
However, the Middle East war has cut a large portion of Europe’s distillate fuel supplies. About three quarters of jet fuel, and a quarter of gasoil and diesel exports through the Strait of Hormuz headed to Europe last year, data from ship-tracking service Kpler showed.
“Europe has lost a meaningful chunk of Middle East middle-distillate supply and is scrambling for replacement barrels from the Atlantic Basin,” Tank Tiger’s Barsamian said.
Going forward, the HOGO will have to reverse and tighten to incentivize exports from the U.S. to Europe, Sparta’s Noel-Beswick said.
“I have a bearish view on the HOGO from here as it needs to move to a position to open the U.S. Gulf Coast ultra-low sulfur diesel medium-range tanker route to Europe,” he said.
(Reporting by Shariq Khan in New York; Editing by Liz Hampton and Diane Craft)
