Largely bearish diesel until Autumn maintenance, bullish jet until those arbs reopen

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

As discussed in last week’s commentary, “This…suggests a bearish outlook for Singapore diesel pricing from this point forward and into the medium term.”

Singapore diesel cracks, more than spreads, have continued their downward trend this week.  

August’s GO E/W and Jubail to Rotterdam & Singapore LR2 freight rates. (Sparta Live Curves)

Jubail LR2s. (Sparta Global ARBS – Dashboard)

The GO E/W has narrowed slightly over the past week, combined with increasing AG/WCI LR2 rates to Europe and declining AG/WCI LR2 rates to Singapore, indicating that both AG and WCI marginal diesel exports should firmly point East.  

August’s Singapore and South Korean diesel premia. (Sparta Live Curves)

Additionally, reductions in South Korean diesel premia, alongside declining premia in Singapore, suggest a continued influx of South Korean diesel exports into Singapore.  

Singapore middle distillate stocks (Enterprise Singapore via Sparta)

Meanwhile, Singapore’s middle distillate stocks have stabilised somewhat over the past week. Given these factors, we maintain a neutral to bearish outlook on Singapore diesel premia.

The timing of this trend is challenging to predict precisely, but we anticipate it will persist until the start of the refinery maintenance period in the Asia-Pacific region in October or a significant widening of the GO E/W. 

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

As we discussed in last week’s commentary, “Considering these factors, we maintain a bearish outlook on European diesel pricing in the short to medium term.”

ICE GO cracks, and to a lesser extent spreads, have continued their downward trajectory since the end of June this week.  

August’s Rotterdam (ARA) and Barcelona (West MED) diesel premia. (Sparta Live Curves)

This trend mirrors the downturn in NWE and MED diesel premia since late June, likely reflecting the seasonal low in diesel demand across Europe.  

August’s HOGO swap and Houston to Rotterdam & Barcelona MR freight rates. (Sparta Live Curves)

Despite recent hurricane disruptions in the USGC, the HOGO has been widening, potentially opening the USGC TA arb to Europe.

However, rising USGC freights have kept this arb closed, although diesel arbs from EC Canada and USAC to Europe remain open due to NY cash weakness.  

As discussed above, reduced supply from AG/WCI into Europe is anticipated as marginal barrels are now pointing East, alongside diminished US supply, evidenced by the decreased arrivals from AG/WCI in July.

This reduced supply coincides with Europe’s low demand period in August and the continued presence of diesel VLCCs directed towards the Atlantic Basin.

Therefore, we maintain a neutral to bearish view on European diesel pricing until the effects of September’s maintenance period begin to influence European premia. 

August’s Singapore regrade. (Sparta Historical Forwards)

Over the past week, the Singapore regrade has further narrowed, alongside a reduction in Asian to Europe LR2 freight rates, effectively closing typical Asian to Europe jet arbitrages.  

August’s NWE jet CIF differential and spread. (Sparta Live Curves)

This development has helped jet fuel prices find a floor.

This recovery is expected to persist until these arbitrages reopen (these can be monitored via the Sparta Commodities platform). 

August’s HO spread and crack. (Sparta Live Curves)

Contrary to our view expressed last week, where we anticipated a bullish trend in US diesel pricing until the storms and their effects subsided, HO cracks, more than spreads, have declined over the past week.  

US crude intake (EIA data via Sparta)

The impact of the recent hurricanes has yet to be reflected in the EIA crude run statistics, and it may take this data to trigger an upward movement in HO prices.

However, persistent issues with US diesel demand, potentially exacerbated by hurricane-related demand destruction (USGC diesel demand is dwarfed by its production though), continue to weigh on the market.

Additionally, high USGC freight rates and reduced port operations due to the hurricanes are curbing diesel exports.  

Considering these factors, we maintain a neutral to bearish view on US diesel pricing going forward.

It would appear currently that USGC refineries have been able to largely deal with any production issues caused by the recent hurricanes. 

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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