ME diesel arbs point to Singapore, whilst the USGC continues to price to export to the USAC and Europe 

WCI barrels maintain their top spot in cost-effective rankings into Singapore, closely shadowed by Arabian Gulf (AG) barrels.

The FOB diesel premia of both WCI and AG have experienced a decline since early October, shifting from over +$4/bbl to under +$2/bbl against MOPAG 10ppm.

India, especially, and Saudi Arabia have sustained high diesel refinery outputs through 2023, and are expected to increase further into the Winter of 2023/24. 

South Korean arbs have significantly dropped in cost efficiency rankings into Singapore. While Middle East (ME) premia have decreased, conversely South Korean FOB premia have escalated from -$1.50 at December’s onset to currently -$0.50 /bbl versus SG 10.

This surge is linked to amplified demand from the US and Latin America’s West Coast, partly due to Panama Canal disruptions. 

South Korea’s shift increase in jet yield indicates a response to Singapore (SG) regrade’s progressive incline over recent months, which is projected to persist with January’s SG regrade soaring to +$1.25 /bbl. 

As we progress into 2024, AG and WCI barrels continue to point eastward for January/February loaders.

A reversal in the recent trend of a widening in the January E/W since early October, should continue due to increased ME arrivals.

However, a monitoring of the continuing reduction in gasoil exports from China and South Korea will be pivotal in understanding these developments.  

Sales prices, denoted here by cracks and spreads, have persistently declined since the early days of October.  

Presently arbs into Europe remain accessible only at the forefront, primarily led by US Gulf (USGC) arbs and followed by Red Sea arbs.  

The weakness in European diesel prices stems largely from ongoing demand issues since the conclusion of Autumn 2022, is aligning with the continent’s general economic slowdown. 

Nonetheless, amidst this prolonged downturn, glimmers of optimism hint at a potential stabilisation in European prices.

Positive economic indicators, including improving job numbers, a slowdown in inflation, and discussions within central banks about lowering base interest rates, paint a somewhat promising picture.

Moreover, despite general European stocks not being notably low, the key pricing centre ARA (and USAC/NY) continues to exhibit strikingly low inventories. 

Looking forward 2024 Middle East diesel loaders point eastward, and European diesel production remains curtailed due to ongoing light crude slates as anticipated.

We should expect a somewhat reversal in Q1 European cracks and spreads as a result. Whilst it’s expected that they’ll regain some lost ground, it’s unlikely to entirely recoup all previous losses as the market navigates through the initial phase of Q1 2024. 

This week January’s USGC 10 differential has witnessed its widest position in four years, solidifying the USGC’s position as the most favourable diesel option across its customary arb destinations in Latin America.  

Despite soaring USGC MR freights, due to in part to the ongoing Panama Canal issues, the USGC is currently the most cost-effective arb for January arrivals to Europe. 

The rise in recent weeks in PADD 3 stocks alongside record-low levels in PADD 1 has opened the waterborne arbitrage from the USGC into New York for January arrivals.  

However, despite this opening, concerns linger about the adequacy of this supply to meet PADD-1’s diesel demand in the first quarter, given the overall low diesel stock levels across the United States. 

We expect a reversal in Q1 HO cracks and spreads after months of decline. This reversal is necessary to facilitate a resupply from East of Suez. 

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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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