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Asia's gasoil east-west price spread at widest discount in over a year

(Reuters) - Asia's gasoil front-month east-west price spread hit its widest discount in more than a year of almost $88 per metric ton, LSEG pricing data showed on Friday, on tightness in prompt Europe supply and high freight costs, sources said.

The spread, typically measured by the exchange of futures for swaps (EFS), has been widening in the past four trading sessions, the data showed. The last time the price differential was above such levels was in early November 2022, ahead of EU sanctions on Russian material.

Higher freight costs on the Asia-Europe route due to the Red Sea shipping woes, tightening supplies - consequentially higher refining margins - in northwest Europe, and sufficient Asian supplies here have led to wider price spreads, three trade sources said.

"Middle distillate stocks in Europe remain tight, which suggests that cracks (there) will remain well supported at least in the short term," said ING analysts in a note.

Gasoil inventories held in independent storage in the Amsterdam-Rotterdam-Antwerp (ARA) refining and storage hub slipped 3.6% week on week to 1.887 million tons on Thursday as imports slowed.

The EFS spread compares front-month Singapore 10 ppm sulfur gasoil swaps and the corresponding ICE low sulfur gasoil futures contract. The wider the spread, the better the economic incentive for holders of Asian cargoes to sell their cargoes to northwest Europe.

Though Asian refining margins for the fuel also rose week-on-week, gains have been tempered with expectations of rising spot supply as east-west swing suppliers such as India could pivot their exports east this month given better profitability.

"WCI exports are now directed towards Singapore rather than Europe, owing to the elevated freight costs associated with European bound voyages," said Sparta Commodities' James Noel-Beswick.

Despite the strength in spreads now, the arbitrage for sellers of northeast and southeast Asian cargoes to northwest Europe should still be closed even after freight costs have eased since the middle of this week as other forward price risks are still present, two of the sources said.

Freight rates for the South Korea-United Kingdom route for a long-range 2 vessel that can ship around 90,000 tons of gasoil have eased by $1 million week-on-week to $6.6 million, pricing data from SSY Tanker showed.

The sustainability of a wide EFS spread in the next few weeks will hinge on freight cost movements and how Europe's demand pans out after winter as Asian supplies should be little changed in March, though some sources are doubtful the former driver will be supportive.

Regional and east-west freight rates are currently reaching a price ceiling and shipowners will have to adjust prices or their positions soon if there are fewer enquiries, one shipbroking source said.

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