AG, WCI and US diesel arbs point or open to Europe, high jet yields start to take their toll on US and EU jet pricing particularly

August Singapore diesel cracks and spreads. (Sparta Live Curves)

As discussed in last week’s commentary, “With these South Korean imports set to continue and WCI arbitrages still pointing east, we maintain a bearish view on Singapore diesel pricing.”

This week, Singapore diesel cracks and spreads have largely continued their downward trend.

However, there was a brief show of strength in Singapore diesel cracks earlier in the week, mainly due to the weakness in the Dubai crude markets.

August’s GO E/W, Jubail to Rotterdam & Singapore LR2 freight rates. (Sparta Live Curves)

The reduction in AG/WCI LR2 freights to Europe continues, although our Freight Commodity Owner Michael Ryan anticipates these rates will soon find a floor.

Sikka LR2s. (Sparta Global ARBS – ARBs Comparison)

Consequently, AG diesel arbitrages are now firmly pointing west, and August and September WCI diesel loaders, with similar netbacks East and West, are likely to flow more westward as well.    

August’s CIF Rotterdam & Singapore and FOB Ulsan LR2 diesel premia. (Sparta Live Curves)

Additionally, whilst European diesel premia continue to decline, South Korean diesel premia have shown the first signs of stabilisation, potentially indicating the start of regional turnarounds in September and October.

This may lead to a slight reduction in South Korean diesel exports.

The expected reduction in AG/WCI arrivals into the Singapore region, coupled with a potential decrease in North Asian diesel arrivals, prompts us to shift our outlook to a neutral to bullish view on Singapore diesel pricing.

August’s ICE GO spread and crack. (Sparta Live Curves)

As discussed in last week’s commentary, “In summary, despite some stabilisation in cracks and spreads, the overall bearish sentiment remains due to increased diesel supply from the AG and persistent demand issues in Europe.”

Over the previous week, ICE GO cracks and spreads have both exhibited losses.

European gasoil/diesel demand (JODI data via Sparta)

AG and WCI diesel loaders are now pointing west to Europe, and these exports are expected to remain elevated until the Middle East maintenance period in September/October.

August typically marks a low diesel demand period in Europe, compounded by the narrowing of the HOGO and the easing of Transatlantic MR freight rates.

August’s HOGO swap and Houston to Rotterdam & Barcelona MR freight rates. (Sparta Live Curves)

The USGC arbitrage to Europe is close to opening and is most probably already viable for USGC refiners.

Our Freight Commodity Owner, David Thwaite, anticipates further mild decreases in TC14 rates as we approach a floor, suggesting that USGC arbitrage to Europe will continue to increase.

This trend has already begun, with July loadings for this route appearing significantly higher than June’s.

The combination of low European demand and increased arrivals from the AG, India, and the US continues to paint a bearish picture for European diesel pricing.

The upcoming NWE maintenance period in September may provide some relief.

The change in positions in ICE GO over the past week (the sales of 21 million barrels) suggest that the market tends to agree.

However, part of this picture has also been the sell off on crude due in part to weakening US labour and tech markets allied with expectations of US interest rate cuts.

US jet yields (EIA data via Sparta)

Contrary to last week’s commentary, “Asian arbitrages to Europe remain closed, prompting us to maintain a neutral to bullish view on European jet pricing,” NWE jet differentials and spreads have exhibited losses this week.

We previously highlighted the importance of monitoring high US jet yields, which have led to the widening of the USGC jet differential over the past few weeks and reducing arbitrage margins to the USAC and Florida.

Port Everglades. (Sparta Global ARBS – Pricing Centre)

Arbs into New York have been decreasing, and those into Port Everglades have shut for the much of the coming months.

This situation is exacerbated by declining Asian LR2 freight rates to Europe.

Consequently, we revise our outlook to a bearish one for European (&global) jet pricing in the short to medium term.

August HO spread and crack. (Sparta Live Curves)

As discussed in last week’s commentary, “…increasing diesel stocks due to high crude runs and poor diesel demand. Consequently, we maintain a bearish view on US diesel pricing,” HO cracks and spreads have exhibited further losses over the past week.

Despite speculations, a potential ban on Russian diesel exports has not materialized (weakening Russian crude exports and ample gasoil exports suggest that there are seasonally high refinery runs in Russia currently), leaving the USGC under pressure in Latin America.

However, a notable increase in diesel exports to Europe is underway, offering some relief.

US diesel demand (EIA data via Sparta)

Nevertheless, with crude runs remaining high and US diesel demand continuing to struggle, our bearish outlook on US diesel pricing persists.

September’s HO crack. (Sparta Historical Forwards)

It will be interesting to observe whether the sustained decline in HO cracks will lead to an expansion of USGC turnarounds in September and October. However, if 2022 is discounted, HO cracks do not appear historically low currently.

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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