Maintenance and run cuts have resulted in a modest recovery in the diesel market but it should be limited with arbs open and pointing to Europe

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

The persistent weakness in the Asian diesel market has continued this week, with declines evident in Singapore diesel cracks and spreads.

They appear however, to have found some stability down the entire curve.

September’s GO E/W and Jubail to Rotterdam & Singapore LR2 freights. (Sparta Live Curves)

Sikka LR2s. (Sparta Global ARBS – ARBs Comparison)

This ongoing softness has significantly widened the GO E/W spread over the past fortnight, while falling LR2 freight rates have further solidified arbitrage flows from the AG/WCI toward Europe, rather than East Asia.

However, our Freight Commodity Owner Michael Ryan expects these freight rates to find a floor in the short term.

Ulsan LR2s. (Sparta Global ARBS – ARBs Comparison)

US PADD 5 (USWC) diesel stocks. (EIA data via Sparta)

There is also an emerging trend of North Asian diesel arbs moving toward the U.S. West Coast, where diesel stocks are declining.

Singapore middle distillate stocks (Enterprise Singapore data via Sparta)

These developments suggest that Singapore distillate stocks should continue to decrease, supporting a moderate recovery in Singapore diesel cracks and spreads.

However, without the impact of significant regional turnarounds or run cuts, any recovery is expected to be limited and rangebound. 

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

As highlighted in last week’s commentary, ICE GO spreads and cracks have stabilised over the past week, finding some support amid a slight uptick in managed money positions, which rose by a modest one million barrels.

This comes as the market anticipates the upcoming maintenance season across major regions, coupled with seasonally increasing diesel demand in the Atlantic Basin as winter approaches—a scenario that presented as an opportune moment for long positions.

US PADD 3 (USGC) crude intakes. (EIA data via Sparta)

Adding to this, reports suggest that simple refineries in the USGC have been operating at minimal levels as a reaction to the unfavourable refining margins.

However, there are not many “simple” refineries in the USGC and as such what it will most probably mean is the least economic barrels in the more complex refineries are “trimmed”.

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

Despite this, the HOGO spread has continued to narrow, indicating little impact on pricing from these refinery adjustments.

Moreover, USGC MR freight rates to Europe have remained stable, keeping the arbitrage to the Mediterranean open and potentially viable for refiners to Northwest Europe as well.

This aligns with the trend of Arabian Gulf and West Coast Indian arbitrage flows also heading toward Europe.

Rotterdam. (Sparta Global ARBS – Pricing Centre)

However, without significant run cuts or a very robust maintenance season in Europe this September and October, the recent rally is expected to be limited and rangebound.

As cautioned in our previous commentary, any rally in the next month to six weeks might offer a timely opportunity to sell, a view we continue to uphold.

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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