Maintenance, winter demand and runcuts may lend some short-term strength to global distillate. Refinery additions are likely to overcome these in Q4

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

As noted in last week’s commentary, Singapore diesel spreads—but not cracks—have found a floor this week, signalling a moderate recovery.

October’s GO E/W. (Sparta Live Curves)

Whilst the GO E/W has largely remained stable, declining LR2 freight rates have kept AG/WCI shipments directed towards Europe, at least in the near term.

This redirection suggests continued downward pressure on inventories, although the extent of cargoes failing to meet Europe’s EN590 winter diesel specifications, specifically cloud, and therefore redirecting East, remains a key factor to watch.

Sikka LR2s. (Sparta Global ARBS – ARBs Dashboard)

Another critical element supporting this stabilization in Singapore diesel markets is the impending maintenance in the Middle East and East Asia.

Of more importance, there are ongoing signs of regional refinery run cuts, driven by persistently weak margins, largely due to poor performance in gasoline and high-sulphur fuel oil markets (in addition to the big repricing in diesel cracks over the last few months).

These pressures are already manifesting in further reduced operations at Chinese (a longer-term trend), Japanese and Taiwanese refineries, with South Korean refineries likely to follow suit as we move into Q4.

Singapore middle distillate stocks. (Enterprise Singapore via Sparta)

Singapore middle distillate stocks. (Enterprise Singapore via Sparta)

This combination of declining stocks, maintenance, and run cuts suggests that the recent floor in Singapore diesel cracks and spreads should hold, albeit with a cautious outlook as global markets continue to weigh under continuing poor diesel demand and refinery additions.

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

The market holds a definitively bearish view due to continuing doubts about diesel demand and elevated inventories as well as the large amount of diesel currently pointed towards Europe.

These are reflected in net short positions on both HO and GO with last week witnessing sales of 9 million barrels of European diesel and 3 million barrels of U.S. diesel.

However, despite this Oct/Nov ICE GO spreads have shown some resilience, gaining since the last week of August. This upward movement is driven by a confluence of factors that suggest a potential recovery in European diesel pricing.

European diesel demand (JODI data via Sparta)

Firstly, the seasonal demand increase expected as we move into the fourth quarter is likely to boost diesel prices, particularly due to the need to meet EN590 winter diesel specifications.

Although the large stockpiles of U.S. and Indian diesel in Europe may temper this impact, the overall demand trend should still provide support. In fact, the currently low diesel prices would present an opportune moment for European buyers to restock ahead of winter.

Saudi Arabian and India refinery intakes (JODI data via Sparta); both witnessed a dip during turnarounds in Sept/Oct 2023

Additionally, the AG and WCI are entering a period of turnarounds and should witness a reduction in run rates due to poor margins, further tightening supply.

US diesel demand (which should improve as we head into Q4) and crude intakes. (which are due to reduce as we head into Q4) (EIA data via Sparta)

Simultaneously, Europe, the USGC, and US in general, are heading into turnaround season, which should limit the availability of diesel and should close the currently open U.S. to Europe arb. U.S. diesel demand is now nearing 2023 levels, and inventories are similarly close to last year’s figures, which should further support prices.

Tropical Storm Francine will be an important factor to monitor here also.

Whilst the medium-term outlook for ICE GO and HO cracks and spreads remains neutral to bullish, the continued ramp-up of Mexico’s Dos Bocas refinery, now operating at over 60% utilisation, could offset some of these gains.

The refinery’s increasing output is bound to reduce Mexico’s dependency on USGC refineries at least, potentially tempering any substantial price increases in the medium to long term.

October’s Singapore regrade. (Sparta Historical Forwards)

Jet fuel pricing globally should remain high in the very short term, bolstered by the current dynamics in Singapore regrade, which should curtail arb flows into the Atlantic Basin.

Asian jet prices have seen a notable rise in recent months, driven by reduced refinery runs in Japan and China, coupled with a resurgence in Chinese passenger numbers.

Our outlook on run cuts and global maintenance activities further supports the prospect of firmer jet prices.

US jet yields and stocks (EIA data via Sparta)

However, several bearish factors suggest that a correction in global jet pricing may be on the horizon.

Chinese passenger numbers are beginning to plateau as the summer holiday season ends, which could temper demand moving into September, though this may be offset slightly by increased heating demand in Japan during the winter.

Perhaps more critically, high jet cracks have led to elevated jet yields, resulting in significant inventory builds in the U.S. and likely throughout the Atlantic Basin.

These growing stockpiles should exert downward pressure on jet prices globally in the medium term.

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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