Atlantic Basin strength on the back of ULSD tightness, AG/WCI arbs point to Europe 

As has become typical since February’s Russian ULSD sanctions, the Red Sea has emerged as the most cost-effective source of supply for NWE and the MED, aside from the relatively small arb from East Coast Canada.

This trend has been amplified in recent days, with NWE and MED sales prices tripling over the past week.  

As we have highlighted in previous articles, here we see the result of AG/WCI ULSD barrels having been pointed at EoS markets for the past period of time. This is a now a situation that has reversed due to the recent moves in the E/W ULSD.

European market participants have observed a scarcity of Eastern ULSD cargoes, coupled with a reduction in ARA ULSD stocks, partially due to ongoing issues at Shell Pernis refinery. Moreover, a significant ULSD bid into Thames, UK during the window went unfulfilled at the end of last week.

The scarcity of Eastern cargoes helped to briefly open the USGC ULSD arb this week to Europe, prompting European traders to explore these alternative supply options. Unusually high activity in the ULSD TA arb, in comparison to the rest of 2023, has been witnessed this week, with several vessels, including the Sea Eagle, Wisco Adventure, PIS Paragon, Okee John T, Clearocean Hickory, and Mersini MRs, booked on this route.

Furthermore, in a highly unusual move, LR2 SKS Darent has also been scheduled along this route.  

In line with the strength in the European distillate market, the front European GO swap spread experienced a sharp increase from +4 USD/MT to over +12 USD/MT, while the July European GO crack rose from 17 USD/bbl to over 21 USD/bbl this week.

Consequently, the E/W ULSD spread widened from -11 USD/MT to a low of -25 USD/MT.  

With the robustness of the European distillate market, coupled with declining ARA stocks indicating, at least, temporary ULSD shortages, the positive momentum is expected to persist in the short to medium term.

To ensure continued flow of EoS ULSD cargoes to Europe, the E/W ULSD spread will need to maintain its widened position. 

Discounting the important issue of grey Russian ULSD barrels, the USGC has maintained its position as the most cost-effective ULSD arb into Northern Brazil. Southern Brazil, on the other hand, sees AG/WCI ULSD barrels taking the lead, aided by the narrowed position of the MOPAG/SG 10 spread.

Brazilian distributors have been actively seeking ULSD shipments from AG to Brazil this week, even on LR2s, aiming to take advantage of these freights being at their lowest level this year, as previously highlighted.  

Similarly, AG ULSD dominates the market in Argentina, supported by the MOPAG/SG 10 spread as well as similar regional freight dynamics to AG/WCI to Brazil. In the WCSAM region, Far East ULSD remains the primary choice, despite rising FOB prices, in part due to the lowest level of Far East to WCSAM freight this year.  

This week has witnessed significant increases in both HO spreads and cracks, with the spread hitting close to 5 cpg after being flat at the start of the week.

As noted in previous articles, the US distillate stock position is currently at or near the lower end of its 5-year range. Tightness in ULSD supply is evident, in both the US and Europe, within the Atlantic basin, indicating the likelihood of continued strength in the short to medium term.

This strength will serve to incentivize EoS ULSD re-supply, as monitored through spreads, as well as regional yield switching, observed through cracks.  

AG/WCI ULSD LRs continue to serve as the most cost-effective source of re-supply for Singapore, maintaining this position for the next three months of arrivals. This is in large part due to rising Far Eastern ULSD FOB prices, these reaching their highest level since April.

However, as noted earlier in this article, the current strength in the Atlantic basin has directed AG/WCI arbs towards Europe. In June, July, and August, Chinese gasoil exports are rumoured to increase, driven by improved export margins.

Our in-house price analyst, Thomas Cho, reports that Chinese gasoil exports in May have already quadrupled compared to May 2022. This additional pressure on the Singapore distillate complex is expected to maintain the widened position of the E/W ULSD spread in the short to medium term.

With Singapore distillate stocks having reached over two-month highs, Singapore gasoil spreads have not experienced the same increase as those in the US and Europe, remaining at similar levels from earlier this week.  

The widening regrade trend in Singapore indicates that the main stock issue lies in jet fuel. Nevertheless, as mentioned earlier, the widened position of the E/W ULSD spread is anticipated to be sustained in the short to medium term. 

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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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