Remaining very cautiously bullish, ending of EU turnarounds and poor US diesel demand contrast with Asia Pacific turnarounds and “potential” runcuts

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

Singapore diesel spreads have shown some slight strength this week, nearing backwardation in the prompt, whilst diesel cracks have stabilised and even experienced slight gains.

This trend coincides with the peak of the Asia Pacific turnaround period, a factor we’ve previously highlighted.  

June’s Singapore diesel crack. (Sparta Historical Forwards)

 Singapore diesel cracks have meanwhile dipped below their five-year average for the first time since 2022, prompting discussions among Asian refiners regarding potential run cuts.

Senior Pricing Analyst Thomas Cho has observed very early indications of reductions in South Korean and Chinese diesel exports as we transition into June.

These developments collectively paint a bullish outlook for Singapore diesel in the short to medium term.

The amount of extra AG/WCI diesel arbs that actually move East will be important to monitor here.  

Sikka. (Sparta Global ARBS – ARBs Comparison)

Despite WCI loaders currently pointing eastward, reduced Indian exports due to high domestic demand necessitate a narrowing of the GO E/W to redirect some AG cargoes eastward as well.  

Indian diesel demand (PPAC data via Sparta)

This view is compounded by the contrast between the currently ending turnaround period in Europe with a peaking one in the Asia Pacific. 

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

ICE GO spreads and cracks have largely stabilised since the beginning of May, presenting a challenging scenario for forecasting their future trajectory due to conflicting factors.  

On the bearish side, the conclusion of Europe’s turnaround period in May signals increased diesel production, although issues of light crude slates and absent Russian diesel remain.

However, doubts persist regarding Europe’s economic recovery and consequent diesel demand, despite gradual improvements.  

Rotterdam. (Sparta Global ARBS – Pricing Centre)

Conversely, bullish elements include closed AG/WCI diesel arbs into Europe, predominantly pointing eastward, and persistently closed USGC TA arbs to Europe.

There was a brief opening of the USGC arb at the start of the week due to ongoing declines in the HOGO and TC 14 freight.  

June’s ICE GO crack. (Sparta Historical Forwards)

Our stance on European diesel is neutral, as the decline in EU diesel cracks seems to have halted.

However, if pressed for a viewpoint, we would cautiously lean towards bullishness.

The imminent conclusion of Europe’s turnarounds and the onset of Asia’s turnaround season are anticipated to narrow the E/W and redirect more Middle Eastern cargoes eastward. 

July’s HO crack and spread. (Sparta Live Curves)

The HO crack has stabilised since May’s onset, mirroring global trends, whilst the HO spread continues to decline. Concerns over US diesel demand and bio substitution persist as significant factors.  

US diesel demand (EIA data via Sparta)

Despite this, there are initial indications of a slight recovery in US diesel demand. (It is important to highlight here that it is probable that there was an issue with the reported demand numbers in early Q2, part of this “recovery” may be a correction of this).

Additionally, vessel tracking data suggests an ongoing decrease in Russian diesel exports, prompting an increase in US diesel exports to Latin America.  

May’s HOGO swap and TC14 freight rates. (Sparta Live Curves)

The weakening of the HOGO and TC14 freight rates has brought the USGC TA arb close to opening in the prompt. However, without substantial increases in US diesel demand, the outlook for US diesel remains neutral to bearish.