The HOGO spread, which enables traders to manage price risk for middle distillate cargoes moving between the U.S. and Europe, has sharply narrowed amid strong diesel demand in the U.K. and waning heating oil demand in the U.S., according to IHS Markit analysts.

A wide HOGO spread typically indicates poor arbitrage economics from the U.S. Gulf to Europe, although it also depends on other factors, for example, freight costs. The July New York Harbor Heating Oil versus ICE Low Sulfur Gasoil (LSG) futures spread, known as the HOGO or HO/LSGO spread, settled at $0.1764/gal (roughly $55.20/mt) on June 17 on the Intercontinental Exchange (ICE). The spread has tightened by more than $26/mt over the last ten days.

European refining runs were lower in May due to maintenance but are beginning to increase, according to Eleanor Budds, an associate director with IHS Markit downstream. Middle distillate stocks are still high in Europe, and jet demand is around 50% of 2019, so a recovery is not going to happen immediately for airlines, but road fuel demand has been rising strongly and will continue to do so through July to August, said Budds.

 “U.S. refining runs are ramping up, U.S. heating oil demand has vanished, and European demand for diesel is rising,” Budds said. “As for what to expect in the coming months, this situation will continue to evolve in the direction above, but supplies are still plentiful on this side of the Atlantic. I wouldn’t be surprised to see the arb flip back some time in the autumn.”

In the second half of 2020, increased diesel and gasoil demand from across the Atlantic coupled with high inventories and low demand in Europe flipped the arbitrage flow, making it economical to ship diesel and gasoil to the Americas.

Inventories were high in Europe as refineries failed to sufficiently cut runs to meet the fall in demand for middle distillates. Russia was still producing a lot of diesel and gasoil, according to Budds, and fuel stocks piled up in onshore tank farms and in floating storage offshore.

The prompt HOGO spread climbed from around $18/mt in early September 2020 to around $81.50/mt on June 8, ICE data show.

 

--Reporting by Jen Caddick, jenny.caddick@ihsmarkit.com;

--Editing by Rob Sheridan, rob.sheridan@ihsmarkit.com

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