Signs of ULSD tightness in Europe, pressure on Singapore ULSD as South Korean refineries return from maintenance

The Red Sea continues to serve as the most cost-effective source of ULSD supply for NWE and the MED, excluding the relatively small EC Canada arb. This is a trend that is set to continue as the 400 kb/d Jizan refinery comes fully online later this year. 

In an interesting shift from last week, AG and WCI ULSD barrels are currently landing more favourably in NWE compared to the USGC. This can be attributed to increasing USGC FOB prices partially resulting from tightening ULSD availability caused by issues at Galveston refinery, according to our broker contacts, despite the EIA reporting the highest US distillate stocks in 12 weeks, this week. 

Similar dynamics are observed in the Med, where AG ULSD barrels are currently more cost-effective than those from the USGC.

However, there are still several ULSD MRs, including the Valrossa and Torm Sublime, scheduled to perform the TA route in the coming days, likely booked when the USGC TA arbitrage was more viable over the past weeks.

Therefore, AG and Red Sea ULSD arbs currently point towards Europe, while WCI arbs are more mixed, marginally favouring Singapore.

In fact, these WCI arbs are currently the most favourable option for Singapore over the next four months of loadings. We shall endeavour to discuss the Singapore market more later in this article.

The June/July European GO Swap spread declined this week from +12 USD/MT to +6 USD/MT.

However, +6 USD/MT is the still the highest level of this spread since before the Russian sanctions reflecting the general tightness in the European distillate market. European gasoil cracks have largely continued their upward trend, providing further evidence of this tightness.

Reports from broking contacts indicate that offshore Lome/West Africa is also experiencing tightness, with offshore stocks of 0.1-0.3 Sulphur currently below their average levels at approximately 120KT. Accordingly, quite unusual Med fixtures, including the MRs STI Pontiac, Eurochampion & Harrier Bay, have been booked to transport GO to West Africa. 

Clear signs of European ULSD and GO tightness in the short to medium term are continuing. Therefore the E/W ULSD is expected to remain in its widened position to attract WCI ULSD barrels to Europe, while similar pressure will be exerted on the HOGO to alleviate the pressure caused by the EIA build in the past week.

Spreads are likely to remain largely unchanged in the short term, with positive pressure on European GO cracks to incentivize ULSD production and alleviate the tightness in the market.

The USGC continues to maintain its position as the most cost-effective arb route for ULSD into Northern Brazil, if we discount, as normal, Russian ULSD barrels. Notably, two highly unusual USGC ULSD LR2s, Lyric Magnolia and SKS Delta, were booked this week to perform this route. 

However, the situation is more mixed when it comes to Southern Brazil, as AG and WCI ULSD present a significant challenge. The LR2 vessel Four Wind was recently booked to load ULSD from AG to Brazil, further highlighting the competition in this region. 

In Argentina, AG ULSD has emerged as the most cost-effective option, thanks to the lowest AG-Argentina MR freights observed this year.

Despite the EIA reporting the highest distillate stocks in 12 weeks, which contributed to a significant downward move in HO spreads this week from +8 cpg to +2.5 cpg, the HOGO spread remained largely unchanged over the past week.

This would suggest that the US distillate market is not in a desperate situation to export its ULSD. The impact of recent political disruptions in Russia on USGC ULSD imports to ECSAM could be significant with Russian ULSD barrels having accounted for two-thirds of Brazil’s ULSD imports in recent months.

Overall, the outlook for US distillates remains relatively neutral. However, there is expected to be some narrowing pressure on the HOGO spread to facilitate access to the tight European ULSD market in the short term.

WCI ULSD LRs continue to serve as the most cost-effective source of re-supply for Singapore in the present and over the next three months.

However, in a change from last week, the South Korean ULSD arb has surpassed the AG arb into Singapore in terms of cost effectiveness. Notably, South Korean arbs into Singapore are projected to be open or nearly open in the fourth quarter of 2023 and the first two quarters of 2024.

This trend is expected to persist, driven by increasing South Korean GO exports. In May alone, South Korean GO exports reached their highest level in nine months.

Further growth in these exports is anticipated as Ulsan and Yeosu refineries exit their turnaround phases in July. Additionally, Chinese gasoil exports are predicted to continue to increase on the back of improved export margins resulting from reduced domestic demand for GO in China.

On top of this the Front Tyne, which began loading ULSD at Ruwais is anticipated to head towards Singapore. 

However, despite indications from the SG Regrade that the main issue lies with jet stocks, Singapore Middle Distillate stocks reached a two-week high this week, according to our in-house price analyst Thomas Cho. Furthermore, July Singapore ULSD cracks decreased from 20 USD/bbl to 17 USD/bbl, signalling some potential looming weakness in the Singapore ULSD market.

To alleviate pressure on the Singapore market, it is expected that the E/W ULSD spread will widen from its current position in the short to medium term. This will facilitate the redirection of AG/WCI arbs towards Europe, helping to balance the supply and demand dynamics in both regions.

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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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