All arbs including USGC and AG/WCI point to Europe as regional refinery issues continue to take their toll 

12 July 2023 Time to read:  minutes
Sparta Global Arbs Table View

The Red Sea remains the most cost-effective source of ULSD supply for NWE but appears to be closed at the front currently.

Market participants attribute this closure to rising FOB premia in the Red Sea, AG and WCI, driven by increased demand from Europe, reduced freight costs along this route, and a slightly tighter ULSD ME/WCI balance than previous weeks. 

The closure of the Red Sea arb suggests that the shortage of ULSD in NWE may not be as drastic as currently rumoured. However, ARA stocks have decreased again this week, and as such we should expect European sales prices to increase in the short term to re-open these arbs. 

Sparta Global ARBs – Pricing Centre
Sparta Live Curves

In the MED, the most cost-effective arb for ULSD supply is the USGC.  

This shift can be attributed to the most expensive RVO prices since February 2023, at over +19 cpg, and reduced USGC MR freight costs. Furthermore, the MED region has seen a significant increase in sales prices over the past week.

Our sources report that this rise is largely due to issues with the distillate hydrotreater at ISAB refinery in Sicily and the ongoing shortage of EoS resupply.

The July MED ULSD CIF differential has reached its highest recorded level in the past week, nearing +16 USD/MT suggesting that the real tightness in Europe currently is to be found in the MED rather than NWE. 

Sparta Live Curves
Sparta Live Curves

ICE GO cracks continued their upward trend, reflecting the persistent shortage of ULSD in Europe.

Additionally, ICE GO spreads remain highly backwardated, also indicating the ongoing scarcity of ULSD. To avoid severe ULSD shortages as we approach winter, the cracks, at least, will need to maintain their positive trajectory. 

Sparta Global Arbs Table View

As a result, Red Sea, AG, and WCI arbs now firmly point towards Europe, less because of a strong European pull but as a least worst option.

The fixtures also clearly indicate a westward direction. This trend is expected to continue in the short to medium term, as evidenced by the widening of the August E/W ULSD from +12 to +14.75 USD/MT over the past week. 

Sparta Live Curves

Despite US ULSD stocks remaining at the lower end of their 5-year range, the current backwardated position of the HO Swap spread has prompted US players to opt for ULSD exports rather than storage.  

Sparta Live Curves

According to Sparta sources “the ULSD cargo market is currently blessed with several new cargoes on offer between July 15 and August 15”. Consequently, the July USGC ULSD differential has reached its lowest recorded level at -7 cpg. 

Sparta Global ARBs – ARBs Comparison

This development, coupled with the previously mentioned conditions regarding RVO and USGC MR freight costs, has established the USGC as the most cost-effective arb into Brazil, posing a challenge even to the Far East Asian refineries supplying WCSAM. 

Sparta Live Curves

In the case of Argentina, AG and WCI currently hold a prime position. This can be attributed in part to AG and WCI MR freights to Argentina reaching their lowest level this year. 

Sparta Live Curves

Similarly, to Europe, HO cracks have been on an upward trend, providing an incentive for ULSD production.

As long as the market remains in backwardation, the pressure on the US to export ULSD is expected to persist, as storage is less desirable. Consequently, we should anticipate ongoing pressure on the USGC diff to stimulate exports. 

Sparta Global ARBs – Pricing Centre

Following the return of regional refineries from maintenance, South Korean and Taiwanese refineries have regained their typical position as the most cost-effective arb into Singapore. This development has been further intensified by the recent increase in FOB prices from the WCI and AG regions, driven by the growing demand from Europe. 

As mentioned previously, AG and WCI arbs continue to point toward Europe, indicating the stronger demand in that region. Market rumours persist regarding Chinese domestic gasoil demand, which is believed to have surprised to the downside due to the current construction recession. This should result in increased gasoil exports, further weighing on Singapore ULSD and gasoil prices. 

However, there is some positive news on the horizon. Our in-house cross-commodity owner, Phillip Jones-Lux, has indicated that Q4 2022 implied diesel demand in China rose significantly to an average of 4,150 kb/d from 3,416 kb/d in Q3 2022.

This trend typically occurs every year as temperatures fall and flood instances decrease in China, providing a glimmer of hope for the Singapore region. 

Sparta Live Curves

Despite the seemingly bearish signals, Singapore spreads and cracks have made positive movements over the past week. Nevertheless, it is expected that AG and WCI barrels will continue to be pulled toward Europe in the short to medium term, given the relatively stronger demand in that market.

As such, we should expect widening pressure on the E/W ULSD spread to continue in the short term. 

Sparta Global ARBs – Pricing Centre

All ME & WCI LR2 jet arbs into NWE and the MED, are open for the next three months of arrivals, which aligns with the approaching European holiday season, with South Korean refineries following suit at the very front. The widened position of the jet E/W spread continues to incentivize these flows.  

Source: EIA

There are a couple of notable recent developments. Firstly, Kuwait’s KPC has started up the third and final CDU at its Al-Zour refinery, expected to boost jet production to around 4.5 million MT per year.

Secondly, FOB Jet AG Diffs to MOPAG have decreased from 2.5 USD/bbl to 1.5 USD/bbl this week, as the market experienced the impact of additional jet exports from the WCI. According to our sources, India is currently a significant seller of jet fuel, with companies like MRPL, Sikka, and Vadinar actively participating.

Indeed, Indian jet production during the first five months of 2023 has surged by 27% compared to 2022, while jet demand in India over the same period has only increased by 11%. 

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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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