Tide of diesel from the East imperils Europe's rally

LONDON (Reuters) — A recent rally in European diesel prices could be jeopardized by rising inventories in November as a raft of tankers sets sail from the East, reversing two months of stock declines following Hurricane Harvey.

Up to 450,000 bpd of diesel, or some 1.8 MMt, are set to reach Europe and the Mediterranean in November from Asia and the Middle East, according to Reuters shipping data and traders. That would mark a 50% increase from recent months.

Those include the very large crude carrier Coshonour Lake, which was heading from Singapore to Europe on its maiden voyage with a cargo of 2 MMbbl of diesel. The cargo, expected to reach Gibraltar on Nov. 26, was initially bought by China's Unipec and later sold to Vitol, traders said.

With around half of Europe's cars fueled by diesel and its refineries unable to meet domestic demand, the region regularly imports around 850,000 bpd of diesel primarily from the US Gulf Coast and Russia but increasingly also from the East.

"Everywhere you look, exports are going to grow," a trader said.

When Harvey struck the US Gulf Coast in late August, traditional trading routes were retraced as more than a quarter of the United States' refining capacity was crippled for weeks.

Europe became a key supplier for Latin America and even the US East Coast, draining stocks to below their 5-yr average for the first time in years and prompting a rally in benchmark diesel prices to a 27-month high in late September, supporting a rise in global crude prices.

That, in turn, opened arbitrage opportunities from the East.

With refineries in China, India, the Middle East as well as Russia and the United States ramping up exports after completing maintenance, things could change.

Diesel imports into Europe are likely to surpass 1 MMbpd in November versus an average of 800,000 bpd in the previous two months, which will lead to an increase in stocks, traders said.

The build comes as net long positions in benchmark European and US diesel futures hover near an all-time high.

"There is a lot of length in the diesel market and if there is a mild winter the draws could become builds and that could undermine a lot of this support," according to Robert Campbell, head of oil products markets at consultancy Energy Aspects.

European stocks of middle distillates, which include diesel and heating oil, declined by less than 1% to around 440 MMbbl in September, according to Euroilstock data.

Diesel inventories were nevertheless expected to post a much stronger decline of up to 20 MMbbl in October as the impact of lower imports will be stronger, traders said.

Reporting by Ron Bousso; Editing by Dale Hudson

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