Trump’s Diesel Ban Talk Has Just Made US Exports More Lucrative

(Bloomberg) -- The threat of a ban on US diesel shipments to foreign markets has helped make those very exports more profitable for traders.

Diesel traders monitor the difference between New York futures and prices in Rotterdam to get an idea of how profitable it is to transport the fuel from the US. European prices raced ahead this week, after US President Donald Trump said he favored a restriction on exports.

Europe is desperate for diesel after the Iran war led to a swath of lost supply and attacks on Russian oil refineries by Ukraine added to tightness in the global market. The US is now the bloc's top external supplier, creating concern among European politicians about a ban because there is now a shrinking pool of alternative suppliers.

In the event of a ban, US diesel prices are widely expected to plummet, at least in the short run. A halt would leave America's allies including Brazil and the UK urgently needing to secure fuel.

The so-called arbitrage for shipping diesel across the Atlantic is currently open for cargoes from New York and the Gulf Coast that are booked for immediate shipping, according to Sparta Commodities, a researcher.

One shipbroker said in a note that activity has picked up as expectations grow for curbs on diesel exports, with ships being booked for the end of September and October. Rates for shipping on products tankers across the Atlantic have hit their highest since early August, indicating rising demand to move cargoes.

To be clear, US futures normally trade slightly above European ones and only offer an indication of whether the arbitrage is profitable.

That's because most of the actual supply comes from refineries on the US Gulf Coast, not New York where the futures contract is based. Traders conducting arbitrage deals then apply premiums or discounts to physical supplies to calculate arbitrage profitability. Several traders and brokers said there has been heightened interest in booking tankers to take US supplies to Europe following Trump's comments this week.

Nymex futures plunged near parity with European contracts this week, fair-value data compiled by Bloomberg show. That compares with an average of about 23 cents a gallon in the first eight months of the year.