Projected low Chinese diesel exports, Middle Eastern arbs pointing East and low Atlantic Basin stocks; bullish signs in global distillates manifest

South Korean arbs have recently outpaced WCI arbs, emerging as the most economically efficient route into Singapore.

Surprisingly, this occurred despite the consistent escalation in South Korean FOB premia since mid-November 2023, which have moved from -$2 to -$0.5 /bbl versus MOPS 10ppm over this period. 

The primary driver behind this shift involves the escalating ME LR1 and LR2 freight rates, partly catalysed by the Red Sea complications and constrained vessel availability in the ME region. 

However, amid these developments, the GO E/W has notably narrowed in the last fortnight, moving from -$26 to -$16/mt.

This shift owes much to the unexpected announcement of China’s refined product exports set at 19 million tons, far below the market’s anticipated 30 million tons.

Consequently, AG and WCI arbs have taken a decisive turn eastward, defying prior trends of moving westward. 

The continuous limitations on Chinese diesel exports, allied with Singapore middle distillate stocks currently being at 5-month lows, are anticipated to sustain upward pressure on Singapore diesel cracks for the foreseeable future.

Simultaneously, the E/W differential must remain at these narrow levels as the Asia Pacific region seeks diesel replenishment from more distant origins due to the limited supply from China. 

Currently, most arbs into Europe appeared closed. We have discussed above why East of Suez (EoS) arbs into Europe are closed.  

Regarding USGC arbs, January’s HOGO swap and USGC 10 diff have surged recently, reflecting persistent concerns about low seasonal diesel stocks heading into winter. 

Conversely, the US economy is displaying a more positive outlook with anticipated diesel demand growth and potential interest rate cuts, a contrast to the prevailing fears surrounding the European economy.

These apprehensions are reflected in the bearish positions in ICE Gasoil (GO) within the market. 

Despite these contrasting economic sentiments, several factors suggest a potential uptick in ICE GO cracks and spreads as Q1 2024 progresses.

The current low ARA stocks, the closure of external arbs, and EoS arbs predominantly pointing East all contribute to this forecast. 

Furthermore, projections of higher-than-average turnarounds in the US, EU, and ME in Q1 2024 ahead of winter reinforce this expectation. 

Notably, the signs of this projected upturn have already surfaced, evident in the recent upward trajectory of January’s ICE GO spreads and cracks since the end of 2023. 

USGC MR freight rates have cooled down, in contrast to the above-mentioned LR freight rates in the Middle East.

This has helped reposition USGC arbs as the most cost-effective into East Coast South America (ECSAM), notably also driven by the narrowing of the GO E/W.

It is, however, important here to mention the heightened export program from Russia via Primorsk in January; a large percentage of these exports headed to ECSAM in December.  

West Coast South America (WCSAM) arbs continue to be dominated by Far Eastern origins. Reduced freight rates from these regions an important factor allied with persisting issues at the Panama Canal.   

Currently, the only arbs open into New York are from East Canada (and presumably the colonial pipeline).

The low diesel inventories in PADD 1 correspond with the overall US inventory picture.  

As such, increases in HO cracks and spreads in Q1 2024 should be expected to attract external resupply into PADD 1, especially crucial given the projected high turnaround activity in PADD 1 towards the end of Q1. 

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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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