Bearish on Asian and European diesel and jet until Europe’s September maintenance period; however important to monitor US hurricanes and European heat issues

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

Contrary to the point made in our commentary of two weeks ago, where we suggested a bullish outlook for Singapore diesel pricing due to expected reduced arbitrage arrivals, Singapore diesel cracks and spreads have been on a downward trend over the past couple of weeks.  

Singapore middle distillate stocks (Enterprise Singapore data via Sparta) & Sparta Historical Forwards; August’s Singapore regrade.

Singapore middle distillate stocks (Enterprise Singapore data via Sparta) & Historical Forwards; August’s Singapore regrade.

Despite the continuing decline in Singapore middle distillate stocks, stock data and the current position of the Singapore regrade indicate that the real inventory decline has been more pronounced in jet fuel rather than diesel. 

(Diesel); Singapore. (Sparta Global ARBS – Pricing Centre)

The escalation in AG/WCI diesel premia has shifted market dynamics, making South Korean arbitrages the most cost-effective option for Singapore.

Consequently, we anticipate increased arrivals from North Asia into Singapore in the coming weeks, contrasting with the reduced flow from AG/WCI. 

Sikka. (Sparta Global ARBS – Dashboard)

While AG cargoes are now directed westwards, WCI arbitrages continue to head east.

This, combined with the expected surge in arrivals from South Korea, suggests a bearish outlook for Singapore diesel pricing from this point forward and into the medium term.

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

As we discussed in our commentary two weeks ago, European diesel cracks and spreads have both declined over the previous fortnight, affirming our bearish view on European diesel pricing.  

August’s GO E/W. (Sparta Historical Forwards)

AG cargoes are already directed westwards, and with the expected downward trend in Singapore diesel pricing, we anticipate the GO E/W spread to widen further.

This shift is likely to redirect WCI cargoes westward as well, especially considering the current storm-related disruptions and refinery issues affecting USGC arbitrages into Europe.

Additionally, numerous VLCCs en route to the Atlantic Basin will contribute to this westward flow. 

July’s Rotterdam and Barcelona MR diesel premia. (Sparta Live Curves)

European diesel premia have been in decline for the past two weeks, a trend expected to persist as French refineries return from strike action and Europe enters the seasonally low diesel demand period in August.

However, refinery heat issues, particularly in the Mediterranean, will need close monitoring as summer progresses. 

(Diesel); Barcelona. (Sparta Global ARBS – ARBs Comparison)

Interestingly, despite the recent widening of the HOGO, the USGC TA arb to Europe has nearly opened due to reduced USGC MR freight rates. However, according to our freight commodity owner, David Thwaite, this situation is temporary.

He attributes the drop-in rates to pre-4th of July demand spikes and subsequent market corrections, along with cautious behaviour due to hurricane concerns. Thwaite predicts a pick-up in activity and rates as normal conditions resume next week. 

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

Considering these factors, we maintain a bearish outlook on European diesel pricing in the short to medium term. (The market appears to have a similar view with the previous week witnessing a trimming of bullish ICE GO positions).

This outlook is contingent on the absence of significant refinery heat issues and will likely hold until the start of European maintenance in September. 

August’s NWE jet CIF differential and spread. (Sparta Live Curves)

As discussed in our commentary two weeks ago, “we should expect further pressure on jet differentials and spreads in the coming weeks, a view further supported by current US jet yields.”

Indeed, NWE jet differentials and spreads have declined over the past fortnight.  

(Jet); Rotterdam. (Sparta Global ARBS – Pricing Centre)

Despite the narrowing of the Singapore regrade (see figure 2), AG/WCI jet arbitrages remain open to Europe, compounded by ARA jet inventories at three-year highs.

Consequently, we maintain our bearish view on European jet pricing in the short to medium term. 

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

As discussed in our commentary two weeks ago, “Given these factors, we maintain our bearish view on US diesel pricing into the medium term.”

Both HO cracks and spreads have declined over the previous fortnight.

However, it is important to note that the USGC diesel diff has narrowed since the end of May reflecting the currently intensified hurricane season. 

US crude intake (EIA data via Sparta)

The current large storm conditions in the USGC region have led and should lead to further reductions in the previously high crude runs and to a lesser extent should also impact internal US diesel and export demand.  

By Delivery Date (diesel); Americas. (Sparta Global ARBS – ARBs Comparison)

However, due to previously mentioned increased FOB premia in AG/WCI as well as rising freight rates from these regions, the USGC and USAC remain the most cost-effective arbitrage options for most parts of Latin America.

Consequently, we hold a bullish view on US diesel pricing until the storms and their effects subside. 

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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