AG CPP Market Report: Improving arb margins strengthen case for higher freight rates

AG LR1: Mid-December loading LR1 arb margins have strengthened sharply over the past week. All AG Dec LR1 product arbs are open except diesel into Singapore. Diesel and jet flows into Europe are workable through January, and naphtha arbs into Singapore and the Far East are open. With both East and West showing incremental product pull, LR1 demand is improving from multiple delivery regions. WCI loading arbs depict a similar freight demand story.

LR1 availability is back below average levels, with 9 open ships in the 7-day window versus an average of 12. With arb demand improving in both basins, prompt LR length should continue to tighten into December.

The Sparta spot FSD model is currently neutral to mildly bearish, but given the breadth of open arbs, model arb inputs should turn supportive as we move into December. TC5 spot at 171 WS looks undervalued versus current arb margins and should begin moving higher toward Dec paper at 197 WS as first-decade pricing starts. Dec TC5 paper at 197 WS also looks undervalued relative to the positive product margins. Using the Jubail–Chiba naphtha arb as the upper margin boundary, Dec TC5 paper has room to firm toward ~212 WS before that arb closes.

Michael Ryan, our Freight Commodity Owner at Sparta, brings over a decade of experience with Trafigura in the energy sector managing risk across products and regions before becoming Head of Risk for subsidiary Puma Energy. Michael then joined the Trafigura commercial team trading freight while successfully growing the physical fleet through strategic dealmaking.

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