Are we seeing the start of the recovery in both diesel and jet globally?

September’s Singapore diesel crack and spread. (Sparta Live Curves)

Singapore diesel cracks and spreads have continued their decline this week, yet signs of stabilisation are emerging.

As noted in last week’s commentary, “Given these factors, we maintain a neutral to bullish view on Singapore diesel pricing in the medium term,” both cracks and spreads have found a floor in recent days.

Additionally, the GO E/W spread has narrowed slightly, reflecting a relative strengthening of the Singapore diesel market compared to Europe.

September’s GO E/W and Jubail to Rotterdam & Singapore LR2 freights. (Sparta Live Curves)

Despite the ongoing decrease in Middle Eastern LR2 freights, the reduction has been more pronounced westward than eastward, encouraging diesel cargoes to continue to head west rather than east.

Vessel tracking data confirms that no diesel cargoes have moved east from the WCI in August, underscoring this westward trend.

By Origin Dashboard; Jubail LR2s. (Sparta Global ARBS – ARBs Comparison)

This shift has been further supported by increasing FOB premia for diesel in the AG and WCI, likely in anticipation of regional refinery turnarounds scheduled for September and October.

However, this rise in premia might also be also due to an attempt to counterbalance declining freight rates.

September’s Ulsan, Mai Liao, Jubail & Sikka LR2 diesel premia. (Sparta Live Curves)

Taking these factors into account, we maintain our neutral to bullish outlook on Singapore diesel pricing.

The market’s current dynamics, coupled with expected regional turnarounds, suggest that the recent floor in cracks and spreads could signal a more stable period ahead, with potential for further strengthening as supply constraints and regional maintenance come into play.

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

The European diesel market has remained weak, as we have noted since mid-June, with August’s ICE GO contract expiring on a particularly soft note.

However, as highlighted in last week’s commentary, “Despite current bearish trends, we hold a slightly bullish view for European diesel pricing in the medium term as we move towards the end of Q3 and the start of Q4.”

September’s ICE GO spread and crack have shown signs of stabilisation in recent days, a trend we expect to persist mildly as European refineries enter their turnaround season and demand begins to increase towards the end of Q3.

September’s HOGO swap and Houston to Barcelona & Rotterdam MR freights. (Sparta Live Curves)

US crude runs (EIA data via Sparta)

The HOGO has widened, driven by a reduction in U.S. crude runs and a seasonal uptick in U.S. diesel demand.

The real driver of this arbitrage however, is the reduction in freight rates, which has made these transatlantic moves more viable, particularly for refiners.

Rotterdam. (Sparta Global ARBS – Pricing Centre)

Despite this, the arb margins for diesel shipments from East Coast Canada, the USAC, and the USGC to Europe have been tightening over the past week. With nearly 2 million metric tons of ULSD currently en route to Europe, it will take some time to clear this supply overhang.

Additionally, the ongoing discussions around the potential booking of further East Asian VLCCs for Europe will be crucial to monitor as the market navigates this period of transition.

Seasonals; September’s Singapore regrade. (Sparta Live Curves)

Singapore regrade has been advancing towards, and nearly surpassing, its seasonal highs, driven largely by declining Japanese run rates, which have impacted kerosene stocks.

This development has also squeezed the margins for Asian-origin jet arbitrages to Europe.

Rotterdam. (Sparta Global ARBS – Pricing Centre)

Meanwhile, although U.S. jet yields remain elevated, the reduction in total crude intake is leading to lower overall jet production.

These factors combined suggest that NWE jet spreads and differentials are likely to find a floor in the coming weeks, stabilizing after recent pressures.

September’s HO spread and crack. (Sparta Live Curves)

The key thrusts of our US diesel commentary have been discussed briefly above.

A key focus is the reduction in U.S. crude runs, which is occurring unusually early, well ahead of the traditional maintenance season in October.

Typically, refineries ramp up production until the start of turnarounds, making this early decline notable.

US diesel demand (EIA data via Sparta)

Alongside this, there has been a slight improvement in U.S. diesel demand, adding a positive element to an otherwise challenging market.

These factors when combined suggest that we may witness a mild recovery in HO cracks and spreads in the coming weeks.

Whilst the overall outlook remains cautious, the early reduction in crude runs and the uptick in diesel demand could provide some much-needed support to the market as it navigates the final stretch as maintenance season begins.

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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