India’s exports of low-sulphur diesel to Europe are anticipated to reach a two-year low in January due to heightened security risks in the Red Sea, driving up freight costs. Trade sources and analysts suggest that volumes have already declined by approximately 80% month-on-month, ranging between 33,400 to 58,000 barrels per day (bpd), according to shiptracking data from Kpler, LSEG, and Vortexa.
The surge in freight costs, up more than 30% on the Asia-Europe route in the past week, is attributed to the war risk premium added to the rates. Traders and analysts speculate that the persistently high freight costs may lead sellers of India-origin cargoes to explore Asian markets, tightening diesel supplies into Europe further. This scenario is likely to unfold ahead of the refinery maintenance season, with major facilities like Shell’s Pernis plant in the Netherlands and ExxonMobil’s Rotterdam refinery undergoing maintenance.
Europe’s largest oil refinery, Shell’s Pernis plant, has commenced maintenance, taking half of its 400,000 bpd capacity offline until mid-April. Similarly, ExxonMobil is scheduled to shut down its 191,000 bpd Rotterdam refinery for maintenance from mid-February to late April.
The increase in freight costs has impacted the arbitrage from the U.S. Gulf Coast to Europe, as indicated by the gains in the spread between the two front-month European ICE low-sulphur gasoil futures contracts, reaching $23 a ton in backwardation on Monday.
Analysts at shipbrokers Gibson noted, “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.”
Cargoes typically sailing from India to Europe via the Bab-el-Mandeb strait have faced challenges due to Houthi attacks on Red Sea ships, driving up freight costs and effectively closing the arbitrage since the first half of January.
Despite the challenges in diesel exports, India’s shipments of aviation fuel to Europe have remained steady, benefitting from an open arbitrage window and stable demand. Jet fuel swap prices are trading at least $3 a barrel above diesel, compensating for additional freight cost premiums.
While diesel exports face headwinds, the sturdy jet fuel market, with open arbitrage and consistent demand, provides a silver lining for India’s energy exports to Europe amid complex geopolitical and freight dynamics.
