By Shariq Khan and Laura Sanicola
NEW YORK/WASHINGTON (Reuters) -A slump in U.S. refining activity and disruptions to global trade have tightened diesel supplies in recent weeks, dampening historically high U.S. diesel exports to Europe this month.
Difficulties in securing U.S. diesel complicate an existing supply crunch in Europe, which previously relied on Russian fuel exports. U.S. diesel cracks briefly surged to a four month high of over $48 a barrel this month, crimping arbitrage opportunities to ship the fuel to Europe.
Many of Europe's other suppliers in the Middle East and Asia have been forced to traverse around the Cape of Good Hope due to Houthi attacks on vessels in the Red Sea, adding lengthy delays and making that trade less profitable too.
European imports of U.S. diesel fell by almost half this month to 6.65 million barrels, down from 11.44 million barrels in January, which marked the highest level since August 2017, according to analysis by ship tracking firm Kpler.
"European diesel appears to be the key at-risk product due to rerouting, supply availability, and distorted arbs," Macquarie analysts said in a note this month.
The decline in trade came as the 435,000 barrel-per-day BP (LON:BP) Whiting refinery in Indiana - a major U.S. diesel producer - was forced shut in early February following power outages.
That outage coincided with operational issues at several plants from a mid-January cold snap, like TotalEnergies (LON:TTEF)' 238,000 bpd Port Arthur, Texas, refinery. Others, including Motiva Enterprises' 626,000 bpd plant in Port Arthur, are undergoing planned turnarounds.
U.S. refinery utilization rates have fallen from near 93% at the start of the year to 80.6% this month, the lowest rate since December 2022, according to government data.
As a result, U.S. refiners' distillates output slumped to 4 million barrels per day in the week ended Feb. 9, also the lowest since December 2022. U.S. distillate stockpiles have dropped for five straight weeks and now stand 10% below the prior five-year's seasonal average, the data showed.
Diesel prices in Northwest Europe rose steadily throughout February, averaging over $118 a barrel, compared with $109 last February..
OPEN ARBS AHEAD
With European refineries set to undergo their own turnarounds in March and April, European diesel prices are poised to rise further and that could help revitalize flows of U.S.-made diesel to Europe, Kpler analyst Matt Smith said.
Meanwhile, expectations of U.S. refineries' restarting imminently have pulled back the country's diesel crack by nearly 30% from recent highs to $34 a barrel.
U.S. refiners are expected to increase available refining capacity by 431,000 bpd for the week ending Feb. 23, cutting offline capacity to 1.8 million bpd, research company IIR Energy said on Friday.
The decline in U.S. diesel prices and subsequent jump in their European counterparts, represented by the HOGO swap [HO-LGO1=R], have re-opened arbitrage for U.S. diesel to move from the Gulf Coast to Europe for March and April arrivals, according to Sparta Commodities' analyst James Noel-Beswick.
Arbitrage from the U.S. Atlantic Coast for future months appears open also, Noel-Beswick noted.
At least three vessels carrying over 850,000 barrels of diesel from the U.S. Atlantic Coast will discharge at various European ports next month, according to Sparta and Kpler shipping data.
Two cargoes totaling over a million barrels have been fixed from the U.S. Gulf Coast for April deliveries, Kpler data shows.