Higher MGO and gas oil prices and the EUA rally to continue
In this edition of Weekly Market Report, we take a look at the latest developments in the distillate market. We also give an update on the EUA market.
Bunker Port Brief
Houston
Demand in Houston is extremely suppressed. Spot prices and spot premiums are off sharpy as a result.
Market is over supplied with VLSFO. VLSFO spot premiums have turned negative to the USGC 0.5 index. Contract premium still tend to be higher
Port has experienced some weather-related delays due to cold front moving through the area causing high winds. Bunker was suspended at Bolivar Roads anchorage over the weekend. Some barging delays due to loading congestion were reported as well.
As the weather turns seasonably cooler we expect to see an increase delays for wind and fog, especially in the overnight hours
New York
Demand for VLSFO is strong thru Q4 with demand for HSFO waning a bit into end of Q4.
Fujairah, Port Louis, Durban and Walvis Bay did not report today due to vacation.
For port availability and demand, download the full report here.
1. Oil market – ICE gas oil and MGO prices are higher
The US so-called OFAC sanctions are the talk of the town in the oil market. Will they be effective? Will Russia be able to circumvent the sanctions? And will the US enforce the sanctions?
If we examine the crude oil market, it is essential to note that the global market is already, and will likely remain, oversupplied in the coming months.
The spike in “oil at water” we discussed in last week’s issue of the Weekly Market Report appears to be both an indicator of supply abundance and an indicator of sanction impact. The US OFAC sanctions on Lukoil and Rosnef are the latest. Hence, ‘oil at water’ may tell a story about Russian-sanctioned oil having a hard time finding a home.
Look to the distillate market if you want to see the impact from sanctions
However, as we have argued before, the impact from sanctions is likely to be felt in the distillate market. That is, e.g., ICE gas oil, diesel, jet fuel, and Marine Gas Oil (MGO).
Over the last week, we have seen big moves in the European ICE Gas oil benchmark curve, which have spilled over to other distillate paper markets. The front crack (the difference between a barrel of ICE gas oil and a barrel of Brent) in ICE gas oil is now close to USD 35 per barrel. For comparison, it was in the mid 20s in mid-October and around USD 17–18 in June. ICE gas oil also sets the benchmark for diesel, jet fuel, and MGO cracks and prices.
There are several reasons behind the surge in cracks – almost a perfect storm in the distillate market:
- EU sanctions on imported products based on Russian oil take effect on 21 January
- Several successful Ukrainian attacks on Russian refineries over the last week. It seems only a matter of time before Russian diesel exports are halted. Refinery experts estimate that more than 20% of Russian refinery capacity is idle. Last week the largest refinery in Volgograd in Sothern Russia was hit.
- The US OFAC sanctions on Lukoil and Rosneft have turned the refining sector upside down in both India and Turkey – and possibly even in China. This could slow refinery runs, at least in the short term, until refiners switch to non-sanctioned crude. The spike in “oil on water” may reflect this significant change in supply for refineries that previously relied on Russian oil.
- The global distillate market remains tight. US inventories fell by 5 million barrels last week. ARA inventories were down by 71,000 tonnes – less critical than in the US, but still notable.
- There may also be short covering in the futures market. The key November ICE gas oil contract has its last trading day on 12 November, and sharp moves are often seen ahead of expiry. In July, the difference between the contract nearing expiry and the subsequent contract reached a spread of over USD 80/MT.
The market remains highly volatile, and significant price swings can occur before the November contract expires later this week.
Last week, it became clear that Gunvor will not proceed with its planned purchase of Lukoil’s energy assets outside Russia. The US Treasury Department, which administers OFAC sanctions, labelled the Swiss commodity group the “Kremlin’s puppet.” Gunvor has now cancelled the deal.
The new US OFAC sanctions on Lukoil and Rosneft take effect on 21 November. There is now a real risk that Lukoil’s refineries in countries such as Romania, Bulgaria, and the Netherlands may not be able to continue operations thereafter, further increasing uncertainty in the distillate market, particularly within the EU.
That said, the Bulgarian government took control of the local Lukoil-owned refinery on Friday. A move that Germany took earlier with respect to German facilities. It should remove some of the risks to the market.
On the other hand, the move also highlights that even OPEC now recognises that the market cannot absorb more crude in the coming months.
2. EUA market - Political interference risks are rising
Last week, the EUA price (Dec-25 contract) broke the psychologically important EUR 80/MT level on Monday.
The latest COT data showed that, unlike in gas, speculative investors remain heavily positioned for higher EUA prices. It highlights that the EUA market remains vulnerable to profit-taking. However, the price reaction in October appears to support our view that investors have primarily positioned themselves for a tighter EU market over the next two years, and not a short-term move higher in the September ‘compliance month’.
EU member states agreed last week to cut emissions by 90% by 2040 compared to 1990 levels. The decision comes ahead of COP30, which began last week, with official negotiations set to start on November 10. The agreement enables the EU to present an updated climate target.
Concerning the EUA and the EU ETS, we noted that.
- The phase-out of free EUA allocations for CBAM sectors from 2028 will now proceed more slowly, primarily at Germany’s request;
- The new EU ETS2, covering road transport and buildings, has been postponed by one year to 2028
- The use of international climate credits will be expanded, which could ease pressure on the EUA market by reducing fears of further tightening in the sectors already covered by the EU ETS.
Overall, the EU agreement does not change the fact that the EUA market remains structurally tight in 2026–27. However, the postponement of the EU ETS2 and the CBAM changes highlight that several member states are increasingly concerned about high CO₂ prices.
If, as we expect, EUA prices exceed EUR 100/MT in 2026, the likelihood of some form of political intervention to ensure more manageable price levels will rise. Following the latest rally towards EUR 80 MT, short-term price risks now appear more balanced. We would expect the Dec-25 contract to see support at EUR 80 MT. We believe the market remains a ‘buy on dips' market.
-
Learn more
For more charts, download the full report using the link below.
