Continuing bullish signals for ICE GO spreads and cracks but recovering margins/returning supply will be important to monitor

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Commentary summary:

• AG/WCI diesel arbs continue to point East margin wise whilst USGC TA arbs close.
• Increasing distillate cracks contribute to a recovery in refining margins.
• Middle Eastern (Israel/Iran/Hezbollah) issues lend strength to crude which has damaged distillate cracks in the past few days.
• Still largely bullish, particularly ICE GO, but recovering margins/supply will be important to monitor as we move further into Q4.

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

As highlighted in last week’s commentary; “Looking ahead, the expectation of increased imports from both the Middle East and China suggests a likely decline in Singapore diesel pricing in the short to medium term.”

Singapore diesel cracks and spreads have stabilised over the past week, though the diesel crack has been notably weak.

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

Jubail LR2s. (Sparta Global ARBS – ARBs Comparison)

Meanwhile, the GO E/W spread has widened whilst freight rates for Middle Eastern LR2 tankers heading to Europe have increased and for East-bound shipments decreased.

This dynamic keeps Arabian Gulf and West Coast Indian diesel cargoes flowing eastwards, reinforcing bearish sentiment for Singapore diesel pricing.

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

As discussed in last week’s commentary; “evidence of refinery run cuts, particularly in Europe, coupled with ongoing maintenance…support a cautiously bullish outlook for ICE GO and HO cracks into the medium term.” Over the past week, both ICE GO cracks and spreads have gained.

It should be noted though that recent geopolitical tensions in the Middle East have bolstered crude prices, slightly weakening the GO crack.

US diesel demand (EIA data via Sparta)

In contrast, HO cracks and spreads remain under pressure due to unseasonably rising diesel stocks in PADD 1, though a seasonal turnaround in demand is expected as winter approaches.

An uptick in Brazilian/Latin American diesel demand has been noted, in part to ongoing drought caused power outages/issues.

This should also lend support to the HO complex and global distillates in general. The continuing reduction in Russian diesel exports has been important here also.

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

As discussed above, Middle Eastern diesel arbitrages continue to favour East-bound flows, while despite narrowing HOGO spreads, rising transatlantic TC14 MR rates have closed US Gulf Coast arbitrages into North-West Europe, although they remain open to the Mediterranean.

As our Freight Commodity Owner David Thwaite notes, “TC14 has strengthened significantly … think the market is more like WS170 with a number of cargoes appearing to reduce the vessel list and owners being reluctant to take a voyage to a weak European market reflected in the rates.”

Europe should likely see a marginal reduction in diesel imports towards the end of October, despite seeing that a number of VLCCs continue heading to European shores amidst ongoing regional maintenance and run cuts.

Brent aframax to Rotterdam refining margins

Looking ahead, the key question is when the market might shift. The recent rise in cracks for naphtha, distillates, fuel oil, and gasoline has pushed European refining margins back into positive territory, suggesting that runs and distillate supplies may recover in the next four to six weeks.

However, the geopolitical spike in crude prices could slow this recovery—a development worth monitoring closely through our crude vertical.

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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