East of Suez arbs point to Europe, transatlantic arb closed, will this be enough to dampen Q4 spreads?

Europe

Red Sea arbitrage have maintained their prominence into Europe of previous weeks, landing with double-digit margins into Rotterdam.

Arabian Gulf (AG) and West Coast India (WCI) arbs into Europe for Q4 have shifted from closed to open due to escalating European sales prices and September East West (E/W) that has widened from +$18 to +$26 /bbl. Now both directing towards Europe rather than Singapore. 

The widening of September Heating Oil vs Gas Oil spreads (HOGOs) from +20.5 to +22.5 cents per gallon (cpg) has closed the TA (Transatlantic) arb into Q4, despite diminishing US Gulf Coast (USGC) differentials and waterborne premia.  

ARA (Amsterdam-Rotterdam-Antwerp) gasoil stocks have slightly increased this week from recent lows whilst the front spread has dipped from +$17.5 to +$10 this week, mirrored by August Gas Oil (GO) cracks.

Nevertheless, both cracks and spreads have since rebounded, spurred by flat price movements. These largely stemming from natural gas price increases in large part due to supply concerns tied to possible Australian LNG plant strikes.  

With Red Sea, AG, and WCI arbs now pointing towards Europe, coupled with distillate builds in ARA and ongoing demand concerns, caution is advised in purchasing Q4 GO spreads and cracks at current elevated levels.

Forecasts anticipate a reduction in both Q4 cracks and spreads as Europe begins to experience the impact of impending resupply. 

Americas 

The US Gulf Coast has maintained its position as most cost-effective source into Northern Brazil, a trend expected to persist as Russian refineries undergo their August turnaround.

However, a shift is observed in Southern Brazil and Argentina, where AG and WCI barrels regain their cost-effective arbitrage position, driven by the widening of September HOGOs from +20.5 to +22.5 cents per gallon. 

A similar narrative unfolds in West Coast South America (WCSAM), where despite elevated Transpacific MR freight rates, the widened HOGOs have made Far Eastern refineries the most economical arb source, a situation exacerbated by the Panama Canal’s current 154-vessel queue. 

Despite ongoing low distillate stocks in the US, the narrowing of USGC differentials and FOB prices suggests that the US is keen to extend its diesel outlets beyond just Northern Brazil.

This points towards anticipated narrowing pressure on Q4 HOGOs to unlock either European or LatAm arbs in the near to medium term. 

Singapore and East Asia 

WCI retains its status as the most cost-effective arbitrage into Singapore, yet WCI and AG arbs currently point toward Europe, as previously mentioned in this piece.

This reshuffling allows South Korean arbs to challenge WCI into Singapore, fuelled by decreasing FOB prices that are being driven by expectations of extended fuel subsidies and returning South Korean refineries post-turnaround, that should increase cargo availability. 

Notably, despite Singapore’s Middle Distillate stocks hitting an eight-month low this week, sales prices have reduced from MOPS +$2.60 to +$1.70 per barrel.

In the near term, it’s evident that Europe’s impending winter demands necessitate resupply more than Singapore. Thus we predict a continuingly wide or even widened E/W. 

Looking ahead, the anticipated announcement of new Chinese export quotas will not sufficiently fill the void left by reduced AG/WCI arrivals, suggesting that SG10 crack gains will likely continue in Q4. 

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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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