Red Sea issues uplifts spreads and cracks but this appears a little overdone! 

WCI and AG diesel arbitrages have retained their position as the most cost-effective into Singapore currently. Several factors have contributed to this scenario.

Firstly, I believe that the yield shift to jet fuel over the last few months/weeks in the Asia Pacific region has been overdone.  

Secondly, there’s a real imbalance between the strength of Asia Pacific gasoil compared to that of Middle East. Notably, the MOPAG versus Singapore diesel spread for January has reached its lowest level of the year at -$4.65 /bbl.  

Moreover, Asia Pacific premiums, particularly in Singapore and South Korea, have exhibited an upward trend since late November. In contrast, Middle East premiums have seen a continued decline. 

As a result of these developments, the increase in Singapore diesel spreads and cracks witnessed over the last week is anticipated to sustain its upward trajectory in the short term. 

Amid recent developments in the Red Sea region, GO cracks and spreads have shown an upward trend in the past week.

This shift has resulted in a reversal of the GO E/W spread’s widening pattern witnessed over recent months, prompting AG/WCI (Arabian Gulf/West Coast India) Q1 2024 loaders to predominantly now face West.  

These arb routes, including the Red Sea, have been pivotal in supplying distillates to Europe throughout 2023 in the absence of Russian supply.

Consequently, the E/W spread has widened to incentivise continued trade through these routes despite ongoing challenges in the Red Sea.

With the market moving further into backwardation, the GO E/W will need to widen even further to incentivise vessels to route via the Cape of Good Hope. 

Although recent market movements have indicated a bullish sentiment for European and global gasoil markets, this week’s shifts appear to be largely influenced by speculative rumours about the Red Sea issues. This speculation led increase, I believe, is likely to dissipate in the short term with moves in cracks and spreads following. 

Looking ahead to Q1 2024, the European market sentiment should remain optimistic, helped by continuing low stocks in ARA & PADD1/USAC, indicating a probable bullish trend. 

January’s USGC 10 diff experienced a narrowing trend this week, signalling the market’s response to the sustained low diesel stocks across the United States.

However, this adjustment has led to the USGC losing its status as the most economically feasible arbitrage option into nearly all of Latin America as well as firmly closing the arb to Europe.  

This is despite improved USGC MR pricing as available vessel tonnage is on the rise, with some owners contemplating forward cargoes to capture earlier rate strengths, indicating a further correction moving forward. Michael Ryan, our freight commodity owner, notes that Houston to Amsterdam MR rates have already declined by 25% from recent peaks. 

Consequently, and due to the low stocks picture described above, the recent upward trajectory observed in HO cracks and spreads is expected to intensify into Q1 2024, as the US, and the USAC region in particular, will need to search for re-supply further afield. 

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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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