Fears of gasoil tightness send refining margins higher

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SINGAPORE/WASHINGTON, March 3 (Reuters) - Refining profits are surging globally on fears of a potential gasoil shortage, as buyers avoid Russian supplies despite soaring feedstock costs elsewhere, according to oil traders.

Crude prices have surged beyond $110 a barrel since Russia began its invasion of Ukraine seven days ago, on expectations that the market will remain short of supply. Prices are rising across the energy complex, including for gasoil, as buyers avoid Russian supplies following numerous sanctions levied on Moscow.

According to the International Energy Agency, every day Russia exports roughly 1.1 million barrels of gasoil, mainly used for heating or as a commercial fuel to power machinery and generators.

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The Asian gasoil market remains particularly tight and is expected to attract even stronger arbitrage demand from the West in coming days as buyers avoid Russian supplies, trade sources said.

"I see it's more of the tightness in Europe that is spilling over in Asia," a Singapore-based trader said, referring to the recent jump in Asian gasoil fundamentals.

Asian refining margins for 10 ppm gasoil soared to their highest level on record on Thursday, despite soaring feedstock crude oil prices.

Refining margins, also known as cracks, for 10 ppm gasoil jumped to $23.09 a barrel over Dubai crude during Asian trading hours, up from $21.63 a day earlier.

In the United States, the 3-2-1 crack spread , a proxy for refining margins in the world's largest oil consumer, soared to $23.10 on Wednesday, up nearly $5 from the start of the year, even as crude prices have surged as well.

Asian refining margins for 10 ppm gasoil soar to record high on concerns about Europe supplies

Refiners are looking to increase the yield of gasoil in anticipation that Russian fuel supply will be curtailed further.

"The refiners are trying to keep up with demand for all products while boosting yield of gasoil," said one U.S. products trading source.

Cracks for the benchmark gasoil grade in Singapore, which have gained 28% in the past two weeks, were about 77% higher than the nine-year seasonal average, Refinitiv Eikon data showed.

"The Asian gasoil market is definitely feeling a knee-jerk reaction to what's happening in Europe," said another trade source in Singapore.

Russia, a key supplier of oil and refined products, exported 1.1 million barrels per day (bpd) of gasoil in December 2021, data from the International Energy Agency showed.

The exchange of futures for swaps (EFS), which determines the gasoil price spread between Singapore and Northwest Europe , traded around minus $143 a tonne on Thursday, a level that typically leaves the arbitrage window wide open

However, soaring freight rates and bunkering costs might act as a deterrent for Asian barrels heading west, trade sources said.

On the Arab Gulf-Japan (TC1) route for Long Range 2 (LR2) vessels that can carry about 75,000-90,000 tonnes of clean products, shipping rates climbed to 145 Worldscale (W) on Thursday, compared with 75 last week, one shipbroker said, referring to points on the pricing index operated by the Worldscale Association to calculate freight charges.

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Reporting by Koustav Samanta and Laura Sanicola; Editing by David Goodman and Kenneth Maxwell

Our Standards: The Thomson Reuters Trust Principles.

Thomson Reuters

Reports on oil and energy, including refineries, markets and renewable fuels. Previously worked at Euromoney Institutional Investor and CNN.