Significant diesel and jet overhang to work through, but Asian, European, Russian and US maintenance in September/October should be enough to turn the tide

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

In recent weeks, the global diesel market has been grappling with significant stockpiles, and Singapore diesel cracks and spreads have reflected this by largely declining, with cracks being more severely impacted.

This decline in cracks, as noted by our Senior Analyst Phillip Jones-Lux, are partly attributed to the recent strength in the crude market.  

Singapore Middle Distillate Stocks (Enterprise Singapore data via Sparta)

Although Singapore distillate stocks have been steadily increasing, the recent builds are more attributable to jet fuel rather than diesel.  

September’s Ulsan, Mai Liao, Jubail and Sikka LR2 diesel premia. (Sparta Live Curves)

In the broader Asian region, diesel premia in the Arabian Gulf, West Coast India, and Taiwan have been trending downward as these regions ramp up production ahead of their planned maintenance periods in September and October.

This should provide a floor to Singapore diesel pricing in the medium term. 

September GO E/W and Jubail to Rotterdam & Singapore LR2 freight rates. (Sparta Live Curves)

The narrowing of the GO E/Wt spread, coupled with a more significant reduction in AG/WCI freights to Singapore compared to Europe, has shifted diesel cargo flows eastward rather than towards Northwest Europe.

This shift paints a bearish short-term outlook for the Singapore market.  

 However, we anticipate a market correction as Asian turnarounds commence in October, further supported by ongoing reductions in Chinese run rates and expected maintenance in Russian refineries in September.

We are also heading to a higher demand period in both the US and EU that should help to pull more Middle Eastern cargoes to the West.

The confluence of these factors suggests that whilst the immediate future may be challenging, a more balanced market could emerge as we move deeper into the autumn months. 

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

The European diesel market continues to exhibit weakness, a trend persisting since mid-June, with cracks suffering more than spreads this week, in a similar fashion to Singapore.

Diesel arbitrage (arb) flows from AG/WCI now favour eastward movement, although the six VLCCs currently on subs to transport diesel from East Asia and the Middle East to Europe add to the view that although ICE GO should see bullish moves in the medium term, it will likely be rangebound.  

September’s HOGO swap, RVO and Houston to Barcelona & Rotterdam MR freight rates. (Sparta Live Curves)

Despite a narrowing HOGO spread, driven by a slight recovery in U.S. crude runs and ongoing worries about U.S. demand, increased freight costs and RVO have squeezed margins for diesel arbs from the U.S. Gulf Coast (USGC) to Europe. 

USGC to Rotterdam MR diesel arb margins (September arrival). (Sparta Global ARBS – ARBs Comparison)

Interestingly, the diesel arb from the U.S. Atlantic Coast (USAC) to Europe remains open, highlighting the continued weakness in USAC diesel cash, which seems to have closed the Colonial Pipeline arb.

However, the anticipated reduction in diesel flows from both the USGC and AG/WCI to Europe is likely to provide some support to European diesel prices as the region enters its turnaround season in September, coinciding with maintenance in Russia.

As mentioned above the destination of the diesel VLCCs will be important to monitor here. 

Furthermore, recent decreases in bearish positions in the paper markets—U.S. diesel stocks up by 4 million barrels and European gas oil by 2 million barrels—suggest a growing market consensus that prices may stabilize.  

 However, the impact of increasing output from major refineries like Dangote and Dos Bocas will be critical to monitor in the coming weeks as the market navigates these complex dynamics. 

September’s NWE Jet CIF diff and spread. (Sparta Live Curves)

NWE jet differentials remained flat this week, whilst spreads appear to have found a floor.  

Seasonals: September’s Singapore regrade. (Sparta Historical Forwards)

Meanwhile, Singapore regrade has surged to its highest level since pre-COVID, driven by low Japanese refinery runs and a resurgence in Chinese air travel.  

US jet yields (EIA data via Sparta)

In the U.S., reduced crude runs and a slight decline in jet yields have led to somewhat lower jet fuel production.

This has improved external jet arbitrage margins into key U.S. markets like New York and Port Everglades, with reports suggesting the Asian jet arb into the U.S. West Coast is now open.  

Asian jet LR2 arb margins into Rotterdam for October arrival

However, it’s important to note that a significant volume of jet fuel is still in transit towards Europe, which must be absorbed in the very short term. 

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

The HO complex has shown relative strength this week compared to Singapore and ICE GO, with spreads gaining and cracks finding a floor. This resilience is likely supported by the probable closure currently of the Colonial Pipeline arb and a significant number of USAC diesel MRs heading to Europe.  

US crude intake (EIA data via Sparta)

U.S. crude runs have been below both 2023 and seasonal averages for the past four weeks, whilst diesel demand typically rises at this time of year, peaking in November.

Looking ahead, the onset of Russian refinery turnarounds in September, followed by USGC and USAC maintenance in October, further bolsters the outlook.  

By Delivery Date Dashboard (diesel); Americas (October arrival). (Sparta Global ARBS – ARBs Comparison)

However, a potential bearish factor is the continued decline in Asian FOB premia and freight rates, which is challenging the USGC’s competitiveness into Latin American and U.S. West Coast markets.

This can be evidenced by the current loading of the diesel Suezmax (Marcilio Dias) at Sikka bound for Brazil. 

By origin dashboard; Sikka LR1 & LR2s (These arbs currently point West and more specifically to Brazil). (Sparta Global ARBS – ARBs Comparison)

Despite these mixed signals, the market outlook for U.S. diesel remains neutral to mildly bullish, as evidenced by recent fund manager purchases of 4 million barrels, largely closing out previous bearish positions. 

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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