Continuingly bearish positions held in the market but with run cuts and maintenance ongoing, now could be a nice time to get long

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

Singapore diesel spreads have continued to reduce their contango since the start of September, whilst cracks have stabilised in recent days, as highlighted in last week’s commentary.

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

Sikka and Jubail LR2. (Sparta Historical Forwards)

The narrowing of the GO E/W spread over the past week has shifted West Coast India (WCI) diesel arbitrage flows firmly towards the East, particularly Australia, whilst Middle Eastern (AG) arbs favour Eastbound routes over those to Northwest Europe (NWE).

Notably, the Mediterranean offers better returns from AG diesel compared to East Asian destinations. 

Singapore. (Sparta Global ARBS – Pricing Centre)

At present, WCI diesel arbitrages offer more favourable returns than those from South Korea or Taiwan.

Yet, what is most striking is the overall improvement in arb margins from key diesel suppliers to Singapore since August.

This is largely a result of weakness in the freight markets, which has facilitated the increase in margins.

Consequently, an influx of diesel into Singapore is expected in the medium term, potentially capping further gains in diesel cracks and spreads.

However, ongoing run cuts remain a crucial factor to consider and there are signals of broader run cuts across East Asia, although the impact is likely to be modest.

Looking ahead, the outlook for the end of Q4 remains decidedly bearish, with limited recovery expected as market conditions worsen.

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

European diesel markets have shown signs of stabilisation, with ICE GO spreads flat since the end of August and gaining slightly over the past week, whilst cracks have rallied modestly in recent days.

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

Despite diesel shipments from the Middle East and West Coast India increasingly heading East, the narrowing HOGO spread and weak USAC and USG transatlantic freight rates have kept the U.S. diesel arbitrage to Europe open, especially into the Mediterranean.

However, low Russian diesel exports continue to be reported, suggesting a growing demand for U.S. Gulf Coast diesel in Latin America.

Barcelona. (Sparta Global ARBS – Pricing Centre)

Whilst some short-term pressures persist, including the open U.S. arbitrage to Europe, there are signs of potential relief ahead.

A major European refiner’s announcement of system-wide run cuts this week, driven by poor refining margins, points to the likelihood of further reductions in European refinery runs during Q4, especially with ongoing maintenance.

This coupled with the usual winter demand uptick suggests that there may be light at the end of the tunnel.

With the market currently very short/bearish, reflected in heavy fund manager sales last week (20 million barrels of European gas oil and 15 million of U.S. diesel), the next fortnight could present a timely opportunity to get long ICE GO and HO.

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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