Increasing Chinese distillate exports and continuing Red Sea issues, the GO E/W poised to widen further

WCI and AG arbitrage routes have solidified their standing as the most cost-effective channels into Singapore, marked by a downward trend in their FOB premia since the end of summer 2023.  

The reduction in WCI premia, particularly accelerated of late, is in part a strategic response to mounting war-related costs arising from Red Sea issues, a, for example, Suez Canal war premia for a Suezmax vessel soaring from $33,000 on January 11th to a staggering $150,000 presently. 

Despite the widening of February’s GO E/W spread to its widest since October 2023 at -$26.50 /mt, AG and WCI arbitrage routes now point eastward rather than west.

This shift is a product of the freight differentials influenced by Red Sea-related costs, compounded by rising Singapore premia and fuelled by persistently low diesel stocks in the city as well as Thai oil, Eneos refinery (Japan) and Pengareng (Malaysia) issues. 

Some relief emerges here with the anticipated surge in Chinese gasoil and jet fuel exports in January, with diesel exports expected to increase to 975,000 metric tons from December’s 450,000 metric tons, according to industry sources. 

However, as Europe braces for a shortfall in diesel flows, especially due to the customary uptick in demand in February, the GO E/W spread is poised to widen further.

This widening serves as an incentive for charterers to shoulder the costs of navigating through the Suez Canal or via the Cape. 

As several diesel cargoes should sail eastward and Chinese exports surge, the recent increase in Singapore diesel cracks and spreads is expected to encounter a ceiling in the short to medium term. 

On paper Red Sea arbs currently land best into Europe, followed by AG and WCI cargoes. However, this apparent advantage requires further context, particularly considering the significant insurance costs borne by charterers navigating the Red Sea—pertaining to both AG and WCI arbitrage routes—as previously discussed.

On top of this, AG and WCI routes are now predominantly oriented eastward. 

Consequently, we should expect an increase pull for diesel cargoes transatlantic from the USGC.

This shift is already becoming more likely with narrowing of February’s HOGO Swap, which currently stands at its narrowest recorded level at 13.95 cpg.  

As Red Sea flows are projected to decrease or encounter obstacles in westward flow and AG/WCI barrels are primarily directed eastward, the recent upswing in ICE GO cracks and spreads is expected to continue.

This is especially if we consider the normal improvement in European diesel demand typically witnessed in February. 

Parallel patterns echo in the jet premia and differentials in Europe, with NWE premia reaching their highest levels since October 2023.

The robust regrade strength allied with increases in Singaporean and South Korean gasoil premia implies a shift in refinery yields toward gasoil in Asia, a trend expected to continue in the short term.  

The US has witnessed a steady rise in refinery runs, depicted in the above chart by the surge in crude intake since November.

This resurgence in refinery operations, allied with continuing worries about diesel demand, means that the nation’s diesel stocks have now moved within 3% of their five-year seasonal range—a milestone not reached in over a year. 

The combination of the increased stocks, coupled with the previously discussed shifts in the HOGO and the normalisation of USGC MR freight rates to $9.30 /mt after a prolonged period of elevation since November, predicts the imminent opening of the USGC arb to Europe in the weeks to come. 

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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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