India’s exports of low-sulphur diesel to Europe are expected to reach a two-year low in January due to increased security risks in the Red Sea driving up freight costs, Reuters reports.
Volumes have declined by approximately 80% month-on-month, ranging from 33,400 to 58,000 barrels per day. The persistently high freight costs are likely to lead sellers of India-origin cargoes to seek buyers in Asia, tightening supplies in Europe further, especially ahead of the refinery maintenance season.
Freight rates on the Asia-Europe route have increased by more than 30% in the past week, incorporating a war risk premium.
“Disruptions in the Red Sea coincide with the start of global refining maintenance season, with U.S. outages projected to peak in February and European overhauls around March,” analysts at shipbrokers Gibson wrote.
Europe’s largest oil refinery, Shell’s Pernis plant in the Netherlands, has begun maintenance that will reduce half of its 400,000 bpd capacity until mid-April. ExxonMobil is also shutting its Rotterdam refinery for maintenance from mid-February to late April.
The spread between the two front-month European ICE low-sulphur gasoil futures contracts has surged, reaching $23 a ton in backwardation on Monday, indicating market expectations of supply tightness.
High freight rates are hindering the opening of an arbitrage from the U.S. Gulf Coast to Europe. The Bab-el-Mandeb strait route, typically used for India-to-Europe shipments, has become risky due to Houthi attacks, further driving up freight costs.
Additionally, lower average crude runs in January, attributed to minor maintenance at some downstream units at Reliance’s Jamanagar refinery, have curbed imports from India. The increased east-west arbitrage differential aligns with rising freight costs, rendering the arbitrage effectively shut since early January.
This situation underscores the complexities and challenges in global energy trade influenced by geopolitical events, security risks, and maintenance activities impacting supply chains and market dynamics.