Europe still priced out of major arb routes; Sing & USGC markets to take next hit

 

 

ICE gasoil spreads continue to paint an acute need for prompt storage, having stayed in contango through the week.

ARA 10 Brg diffs are trading now in discounted territory which speaks for the particular overhang in the key pricing centre at this time.

Gasoil’s weakness is further highlighted by contrasting with crude structure, which is steeply backwardated.

The collapse in European pricing over April has culminated in NWE pricing itself out of arbed barrels from the EoS and the USGC, with the signal strongest for prompt/May loaders out of the East.

That in theory should help to limit further damage to ICE spreads assuming that some marginal barrels are directed elsewhere in May, however it may take several weeks (and further pressure in Europe) to see arrivals into NWE drop.  

The question also becomes how the main exporting regions will react. The arb from the USGC to Rotterdam for May loaders remains closed despite a substantial cooling in TC14.

However NWE/Med remains the “best” major outlet, and except for the usual base barrels + marginal redirected flows to e.g. Latin America, we should assume that other outlets for the USGC are ultimately capped; (note Houston to WAF Offshore Lome has opened up recently, which may also be reflective of the weakness in the wider market given its location as an offshore storage location).

What is more, while we would take recent weekly DOE demand numbers for the US with a large dose of scepticism, evidently there is some demand problem at play that has allowed both higher exports and kept US stocks relatively ample.

TC14 has done a lot of heavy lifting to try to re-open the arb to Europe, but pressure may need to play out now on USGC pricing and potentially also the HOGO, which could re-test the lows seen in H1 April.

What makes this even more challenging is the return of European refineries for higher summer runs, the peaking and ebbing of Asian turnarounds in the coming weeks, and the relative low season for gasoil demand in the Atlantic Basin.

In the East, Singapore should begin to come under more pressure from global supply.

Arbs out of both Jubail and Sikka still point decidedly away from NWE (partly on strong freight as well as the repricing in European gasoil).

Singapore is the next larger destination – in the case of May loaders out of Jubail, barrels to Sing are fetching at least a $1/bbl additional margin than to NWE, on an LR2. Marginal flows evidently need to go East and may take some weeks to filter through to substantially higher arrivals.

Out of Sikka, May loader margins to Singapore on an LR2 are also at a strong premium to Rotterdam.

All else equal, one should thus expect pressure on Sing spreads, and a re-widening of the prompt E/W, having compressed a little over April as European pricing collapsed.

What may limit the damage out of India are FOB Sikka prices that are going from strength to strength.

That may signal a need to slow down Indian exports just as domestic demand there ramps up seasonally towards the latter half of Q2.

We should also be wary of the potential impact of substantially weaker export econs for key marginal suppliers such as China; the interplay there between quotas, international gasoil cracks, crude runs, and policy is always difficult to read, but there may be growing potential for Chinese outflows to be squeezed over rest-Q2 & Q3.  

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Neil Crosby is an experienced energy market and commodity analyst, specialising in crude oil, oil products, biofuels, and carbon. With roles at OilX and JBC Energy, he has extensive expertise in global oil industry analysis, forecasting tools, bespoke research, and client communication. His focus on refining and petrochemicals underscores his specialisation.

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