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Tuesday, April 28, 2026
Hedging Diesel Price Risk: Low-Sulphur Gasoil (LSGO) Hedging Report
By Century Financial in 'Investment Insights'
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What Is Low Sulphur Gasoil (LSGO)?
- LSGO is a refined petroleum product widely recognised as standard diesel, processed to meet low-sulphur environmental standards.
- It is used across transportation, logistics, industrial operations, and heating.
- LSGO prices generally track crude oil but are also affected by real-world supply and demand.
- ICE Futures Europe contracts on LSGO serve as a widely used benchmark for diesel pricing.
Current Market Context (April 2026)
- Military conflict involving the US, Israel, and Iran (from 28 February 2026) led to restrictions on Strait of Hormuz transit — a key route for approximately 20 million barrels per day of crude and refined products.
- Gulf producers have cut output by at least 10 mb/d; more than 3 mb/d of regional refining capacity is offline.
- Europe sourced 43% of its gasoil from the Middle East in H1 2025 — that supply channel is now severely constrained.
- The EU ban on Russian diesel imports (2022) already required Europe to restructure its distillate supply chain, leaving Amsterdam-Rotterdam-Antwerp (ARA) inventories below seasonal norms.
- This pre-existing exposure has compounded the impact of current disruptions.
How Price Risk Hedging Works — Illustrative Mechanics
- An exporter who holds physical LSGO cargo is financially exposed to price declines between the time of purchase and the time of sale.
- A short futures position — selling LSGO futures — can potentially offset this exposure. If the physical price falls, the futures position gains. On the other hand, if the physical price rises, the futures position loses, but the physical cargo sells for more.
| Position | Exposure | Current Price | Units | 3-Month Ahead | P&L |
|---|---|---|---|---|---|
| Scenario A — LSGO price falls 10% | |||||
|
Physical Cargo
(ICE Exchange)
|
$500,000 | $1,180.50 | 424 | $1,062.45 | -$50,000 |
|
Short Futures
(Century Trader)
|
$500,000 | $1,173.88 | 426 | $1,056.49 | +$50,000 |
| Scenario B — LSGO price rises 10% | |||||
|
Physical Cargo
(ICE Exchange)
|
$500,000 | $1,180.50 | 424 | $1,298.55 | +$50,000 |
|
Short Futures
(Century Trader)
|
$500,000 | $1,173.88 | 426 | $1,291.27 | -$50,000 |
Date – 10 April 2026 · Sources: Bloomberg, ICE Exchange, Century Trader Platform
In both scenarios, the net P&L across the combined position is approximately zero. The purpose of the hedge is to stabilise the outcome — not to generate a gain.
- An importer committed to buying LSGO in the future is financially exposed to price increases between now and the time of purchase.
- A long futures position — buying LSGO futures — can offset this exposure. If the physical price rises, the futures position gains, offsetting the higher purchase cost. On the other hand, if prices fall, the futures position loses, but the physical purchase becomes cheaper.
| Position | Exposure | Current Price | Units | 3-Month Ahead | P&L |
|---|---|---|---|---|---|
| Scenario A — LSGO price falls 10% | |||||
|
Physical Purchase
(ICE Exchange)
|
$500,000 | $1,180.50 | 424 | $1,062.45 | +$50,000 |
|
Long Futures
(Century Trader)
|
$500,000 | $1,173.88 | 426 | $1,056.49 | -$50,000 |
| Position | Exposure | Current Price | Units | 3-Month Ahead | P&L |
|---|---|---|---|---|---|
| Scenario B — LSGO price rises 10% | |||||
|
Physical Purchase
(ICE Exchange)
|
$500,000 | $1,180.50 | 424 | $1,298.55 | -$50,000 |
|
Long Futures
(Century Trader)
|
$500,000 | $1,173.88 | 426 | $1,291.27 | +$50,000 |
Date – 10 April 2026 · Sources: Bloomberg, ICE Exchange, Century Trader Platform
In both scenarios, the net P&L across the combined position is approximately zero.
2 Year Correlation Matrix For Low Sulphur Gas Oil and Brent
| Instrument | Low Sulphur Gas Oil | Brent |
|---|---|---|
| Low Sulphur Gas Oil | 1 | 0.738 |
| Brent | 0.738 | 1 |
Source: Bloomberg
Date: 10th April, 2026
Risks and Assumptions related to Back-tested trading strategies
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