By Ahmad Ghaddar
LONDON (Reuters) - The European diesel market is finding unexpected support from disruption in the refining sector from the shutdown of Russia's Druzhba pipeline due to contaminated oil and after a Russian refinery went bust.
Diesel refining margins, a measure of the profitability of making diesel from crude, hit a six-week high of nearly $15 a barrel on Thursday and were trading close to this level on Friday.
(Graphic - ICE (NYSE:ICE) Gasoil refining margins, https://tmsnrt.rs/2WkFI6o)
Oil in the 1 million barrel per day (bpd) Druzhba pipeline running from Russia to eastern Europe via Belarus was contaminated by chemical compounds which made it unusable by several European refineries that rely on its supply.
"It's all a matter of how much strategic stocks can be released because literally between German, Polish and Hungarian refineries, there are probably five or six refineries which are completely land-locked and there is literally no other way to supply them than the pipeline," one trader said.
Poland, Hungary and the Czech Republic are making available to their domestic refiners around 8 million barrels of crude from strategic stocks to tackle the Russian Druzhba pipeline shutdown, industry sources said on Friday.
Traders said that Total's 240,000 barrel per day Leuna refinery in Germany had slashed runs because of the contamination by around 30 percent but exact details could not be immediately confirmed.
Total declined to comment.
German industry Group MWV said on Thursday that Leuna and PCK's 240,000 bpd Schwedt refinery were arranging to receive crude from tankers coming to the Baltic Sea. It was not immediately clear how the crude would then be transported to the refineries.
"For those refiners who have no infrastructure that would allow a quick access to other crudes other than contaminated Urals, drawing down stocks is essentially the only short-term solution," consultancy FGE Energy said in a note this week.
Traders said the rally in the diesel market follows a bearish April where European demand eased and stock levels did not fall as much as was expected.
"I would say one week ago if you were talking to a distillate crowd, they would have been 90 percent bearish," one trader said.
"The strength is combination of very low Russian exports, eastern imports are also decreasing in May (although they remain high), and Druzhba fears," another trader said.
Primorsk loadings slump
Also boosting margins is a fall by around a quarter of Russian diesel exports from the Russian Baltic port of Primorsk, a major supplier of diesel to the European market.
(Graphic - Primorsk Loading Programmes, https://tmsnrt.rs/2DMKAKf)
The fall in planned loadings, to around 0.88 million tonnes in May, came on the back of the collapse of New Stream's Antipinsky refinery, traders said.
The mid-sized refinery plans to file for bankruptcy, according to a Russian government database.
The refinery declared force majeure earlier this week on loadings of diesel from the port, a trader said.
The strength in margins comes despite expectations of rising imports of middle distillates from other regions supplying Europe.
Traders said imports of diesel from the United States were expected at around 900,000-950,000 tonnes in May, compared with 850,000 tonnes in April. Imports of diesel from the east were expected to top 2 million tonnes in May, traders said.
