Discussion of run cuts, turnaround delays and positive economic signals leads to some small positive signs in global diesel

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

In light of last week’s commentary forecasting stability or improvement in Singapore diesel pricing due to future expectations of reductions in regional exports, Singapore diesel cracks and spreads have indeed gained this week.

Figure 2. June’s Singapore (LR2) and Rotterdam (MR) diesel premia. (Sparta Live Curves)

The increase of AG/WCI cargoes flowing East has kept Singapore diesel premia flat, whilst European premia have seen an uptick.

Singapore. (Sparta Global ARBS – Pricing Centre)

In the immediate term, WCI and AG diesel cargoes are landing most cost-effectively in Singapore, with South Korean arbs becoming more favourable further down the curve.

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

This shift is supported by the narrowing GO E/W over the past week, continuing to direct to WCI (and some AG) cargoes East until Q4.

We have already seen this reflected in Singapore’s stock data, which indeed shows higher arrivals from WCI and AG compared to North Asia in recent weeks.

June’s Sing 92 (gasoline) crack. (Sparta Historical Forwards)

Whilst Asian diesel cracks have made slight gains, Asian gasoline cracks have significantly declined in recent weeks.

This trend suggests potential run cuts, with some refineries likely opting not to operate at full capacity.

Reports indicate that some Asian refineries are delaying restarts post-turnaround season due to lower margins.

Neil Crosby, our AVP of Analytics, has previously highlighted that the current weakness in the crude market further supports the notion of run cuts or trimming.

Singapore diesel imports (week ending 22/05/2024); Enterprise Singapore via Sparta).

Given these factors, it seems improbable that the increase in AG/WCI arrivals will fully counterbalance the impact of potential/probable regional run cuts.

Consequently, we can expect the rise in Singapore diesel pricing to persist in the short term, with a ceiling likely being reached once run cuts cease.

This combination of potential run cuts and shifting arbitrage dynamics points to a cautiously bullish outlook for Singapore diesel pricing in the near future.

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

Both ICE GO cracks and spreads have remained largely flat over the past week.

The weakness in ARA barge differentials signals a need to work through the surplus caused by significant diesel arrivals into Europe in April and early May.

June’s ARA barge differential. (Sparta Historical Forwards)

However, as AG/WCI diesel arbitrages increasingly point East, we should see reduced arrivals into Europe by June.

This trend is further supported by the closure of the USGC diesel arbitrage, except in the very prompt, with rapidly increasing USGC MR freight rates contributing to the closure.

US PADD 3 (UUSGC) diesel stocks (EIA data via Sparta)

Nevertheless, as USGC diesel stocks rise, this arbitrage is expected to move closer to opening in the coming weeks, indicated by the recent narrowing of the HOGO.

June’s EBOB crack. (Sparta Historical Forwards)

In parallel with Asia, reducing EU gasoline margins are prompting the possibility of run cuts in Europe.

Elevated AG/WCI LR2 freight rates are also playing a role by helping to close these arbitrages to Europe, including for jet fuel.

However, our freight commodity owner David Thwaite anticipates a softening of these rates moving forward.

June’s Jubail & Ulsan LR2 freight rates. (Sparta Live Curves)

Given these factors, we maintain a moderately bullish view on European diesel.

The expected weakening of Asian LR2 freight rates should keep jet fuel arbitrages to Europe to open, suggesting that the recent declines in jet differentials and spreads are likely to continue.

Overall, the interplay of reduced diesel arrivals from AG/WCI and potential run cuts due in part to low gasoline margins, and small signs of economic recovery paints a cautiously optimistic picture for European diesel pricing in the near term.

US Crude Runs (EIA data via Sparta)

HO cracks and spreads have both declined slightly over the past week, reflecting a broader trend in the market.

Despite ongoing discussions about run cuts globally, these do not apply to the US, where USGC diesel stocks continue to rise alongside increasing crude runs.

Americas. (Sparta Global ARBS – ARBs Comparison)

The USGC arbitrage remains most favourable into Latin America, where there are some indications of reduced Russian diesel exports heading into June.

However, until we observe the arbitrage to Latin America and Europe truly opening and significant improvements in US diesel demand, the outlook for US diesel pricing remains bearish.

The current conditions suggest that without these critical shifts, US diesel prices are likely to stay under pressure.