Global cracks rebound, Middle Eastern arbs in high demand whilst USGC arbs closed

Europe 

The Red Sea remains the most cost-effective arb into Europe. European sales prices, particularly in the Mediterranean, have slightly dipped, causing AG and WCI arbs into Europe to close for Q4.

However, East of Suez arbs continue to favour Europe for Q4 over East/Singapore, with the October East-West (E/W) spread widening from -$24.25 to -$32.25/bbl in the last week. 

Previously noted late July/early August WCI loadings pointing towards Singapore led to fewer European arrivals from WCI.

This trend is expected to reverse soon with fixtures such as VLCC Maran Donae and Suezmax Popi P set to load and direct towards Europe. Furthermore, our Mediterranean contacts already report abundant diesel availability there, as Med sales prices decreased further last week. 

Reduced WCI arrivals, low stocks (as evidenced by ARA stocks declining this week), refinery issues like those at Total Antwerp, and a 4 million bbl net length increase in ICE GO all contribute to ongoing bullish sentiment.

Consequently, September European GO cracks rose $4/bbl, alongside Oct/Nov GO spreads rising from +$21 to +$27.50/mt in the same period.

While elevated cracks and spreads are needed to incentivize winter diesel production, in the expected absence of transatlantic arb supply, and even using 2022 as a benchmark, it is hard to consider September cracks a buy at +$34 /bbl. 

Given a backwardated market, a symptom of insufficient prompt supply, and a European desire to avoid expensive stockpiling, the Q4 E/W spread is likely to decrease from its seasonally highest level, October E/W at – $34/bbl, encouraging ME/WCI arb movements to the Singapore region in the medium term. 

Americas 

The US Gulf Coast (USGC) faces challenges from AG, WCI, and Far Eastern barrels into West and East Latam. The primary drivers are the strength of PADD1 and high USGC MR freights, which is expected to ease as MR availability improves, as per our US shipbroking contacts.

The strength of the HO contract vs SG 10 continues to price USGC barrels out of Latam despite the September USGC differential hitting a record low of -6.75 cpg and tightening Asian gasoil markets pushing AG South Korean FOB prices around $1/bbl higher over the week. 

However, the dynamic into Latam isn’t expected to change in the near to medium term, with reduced USGC differentials primarily linked to low stocks in the PADD1/New York area, particularly as winter approaches. 

In New York, rapidly rising sales prices have opened EC Canada arbs into the region for Q4, shifting from -16.85 to -15.15 cpg against NYMEX HO this week.

Decreasing USGC differentials have likely opened the colonial arb into PADD 1 throughout Q4, yet this might not be sufficient to address current low stocks. Consequently, elevated Q4 HO cracks are foreseen to persist in the near to medium term. 

As Q1-2024 approaches colder months, PADD 1’s resupply from WCI becomes crucial due to its favourable cold properties. With this anticipation, Q1 HOGOs are expected to reverse their recent narrowing trend, incentivizing EoS TA movements into PADD 1/New York. 

Singapore and East Asia

As highlighted earlier, ME arbs have been consistently pointing toward Europe for the past two weeks. This is likely in large part due to Chinese gasoil exports for August falling short in comparison to July, reportedly due to refiners waiting for the as-yet unreleased 3rd batch of export quotas.

Consequently, South Korean arbs have taken precedence into Singapore. The city-state’s distillate stocks climbed to a four-week high this week, almost all supplied by South Korea.

South Korean barrels, along with those from Taiwan and Singapore, are also experiencing heightened demand from Australia, a situation partly attributed to ongoing maintenance disruptions at Geelong refinery. 

East Asian gasoil tightness persists and as such September SG 10 cracks rebounded $3/bbl over the past week. Contacts in East Asia indicate that jet fuel has increasingly been blended into the diesel pool for local, Australian, and transpacific consumption, playing a significant role in narrowing the Sing Jet Regrade from -$2.75 to -$1.90 per barrel over the last two weeks. 

Looking ahead, the Q4 E/W spread will eventually need to narrow, facilitating ME resupply into Singapore. This necessity becomes more pronounced as Chinese exports continue to underwhelm and with CPC Talin Taiwan and Nghi Son Vietnam refineries preparing for maintenance in September, an early sign of the approaching of East Asia’s secondary peak maintenance period, this year, in September/October.  

Jet

Except for the Red Sea, all Europe-bound arbitrage opportunities have closed, standard for this period as local players complete their holiday season purchases.

Contacts in NWE and the Med note the lowest European jet prices since late May and no shortage of EoS-origin jet. Interestingly, the jet TA arb has opened, diverting focus to the US Atlantic Coast. US sources confirm rising sales prices and jet interest in Port Everglades, Florida. 

AG and WCI jet fuel FOB prices have risen due to refineries favouring diesel production amid favourable gasoil cracks. WCI jet FOB prices surged from +$2.95 to +$5.95 per barrel within a week, paralleling the narrowing Sing regrade that limits these arbitrage chances. 

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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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