A mixed bag – bearish diesel outlook clashes with ongoing geopolitical tensions

Singapore diesel cracks and spreads have sustained their downward trajectory since early February, although cracks have shown some resilience this week, mirroring those trends observed in HO and GO cracks.  

Notably, Singapore has witnessed substantial imports of Chinese diesel throughout March and early April.

Reports suggest a reduction in April’s Chinese diesel exports to 830 KT from March’s 1 million MT. However, South Korea is set to export record gasoil volumes in April. 

Asia Pacific enters its turnaround season, starting in April, and includes key refineries such as CPC Taiwan, Formosa Taiwan, Nghi Son Vietnam, GS Caltex South Korea, and Eneos Japan. 

The prevailing weakness in Asia Pacific diesel is contributing to the current historically wide position of the GO E/W and, as affirmed by our newly released By Origin Dashboard, AG/WCI exports clearly point westward.  

As such and looking ahead, we expect Singapore spreads to find a floor as we near the end of April, following the recent trajectory of their diesel cracks.  

European diesel cracks and spreads have undergone a turbulent week, initially following a downward trajectory in line with trends since early February, driven by increased marginal supply from the US and Asia.  

However, in the past few days, both cracks and spreads have exhibited some resilience, bolstered by ongoing Ukrainian drone strikes targeting Russian refineries, including the recent attack on the Taneco refinery, Russia’s third-largest facility (340 kbd).

These attacks are anticipated to persist, amplifying the effect of other geopolitical tensions, particularly in the Middle East, such as the recent assault on the consulate in Iran and likely continuing to put pressure on Russian diesel exports, also on the back of seasonal refinery maintenance in Russia. 

Concurrently, European refineries are nearing the end of their turnaround period, slated to largely conclude by the end of April, coinciding with the escalation of marginal supply from the US and Asia, notably from AG/WCI exports directed towards Europe and the West, as mentioned previously.

This outlook is further coloured by the anticipated further ramp-up of production at Al-Zour and Duqm refineries in the coming months. European diesel faces a persistently bearish outlook in the short to medium term.  

What is more, Nigeria’s Dangote refinery has initiated diesel sales in the domestic market, signalling an additional bearish element in the broader Atlantic diesel market. 

HO cracks and spreads have mirrored the trajectory of ICE GO this week, albeit with HO spreads edging closer to contango compared to ICE GO.

Despite a downward trend in HO cracks and spreads since early February, there has been a resurgence of strength this week, largely attributed to the ongoing issues with Russian refineries as discussed earlier.  

Notably, ExxonMobil’s announcement of a major turnaround at its 250 kbd Joliet refinery in Illinois, expected to span approximately 50 days, adds further pressure to the downward trend in PADD 2 diesel stocks. However, this will likely do limited damage to US stocks as a whole.  

The HOGO has continued to narrow, driven by efforts to open the TA arb, reflected in the historical seasonal discount of the USGC diesel diff.

However, the arb remains closed for May arrivals into Europe, largely due to high TC14 freight.  

The USGC faces substantial competition into Latin America from Asian-origin diesel, stemming from persistent weakness in the Asian diesel market.

Our USGC broker contacts state “Transpac[ific] discussions are also going on so if you have something loading in Asia that can head this way, let us know”.

Consequently, narrowing of the HOGO and downward pricing trends in the HO complex are essential to facilitate the opening of arbs to both Latin America and Europe. 

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James Noel-Beswick is Commodity Owner for Sparta. Before joining Sparta, James worked as an analyst for likes of BP and Shell, and leads our continued development of the distillate product vertical.

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