The bearish run on diesel to continue, high US jet yields are important to monitor also

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

As discussed in last week’s commentary, “Given these factors, we maintain a neutral to bearish outlook on Singapore diesel premia and prices,” Singapore diesel spreads have continued to decline.

However, the diesel crack has shown some recovery, largely due to weakness in the Brent and Dubai crude markets.

As our Senior Analyst, Philip Jones-Lux, noted in Monday’s commentary, “I think cracks are up as crude has fallen, but that should reverse in the second half of this week unless there’s an underlying reason to keep them higher.” 

August’s GO E/W and Sikka to Singapore LR2 freight rates. (Sparta Live Curves)

This week witnessed a slight widening of the GO E/W, although it remains at its seasonally widest for the past six years.

Despite reducing Singapore diesel premia and aided by decreasing Sikka to Singapore LR2 freight rates, West Coast India (WCI) diesel cargoes still point east rather than west.  

Singapore middle distillate stocks (Enterprise Singapore via Sparta)

As highlighted in last week’s commentary, “Additionally, reductions in South Korean diesel premia, alongside declining premia in Singapore, suggest a continued influx of South Korean diesel exports into Singapore,” last week’s Singapore stocks rose by 2.691 million barrels to an 11-week high of 11.145 million barrels, with South Korea being the largest diesel supplier.

A significant portion of this increase was also due to large jet imports, with potential implications for Singapore regrade. 

August’s Ulsan and Singapore LR2 diesel premia. (Sparta Live Curves)

With these South Korean imports set to continue and WCI arbitrages still pointing east, we maintain a bearish view on Singapore diesel pricing.

The maintenance season in October is likely to be the point at which Singapore diesel pricing finds a floor.

Until then, the combination of increased imports and reduced premia is likely to continue to exert downward pressure on the market, reinforcing our outlook. 

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

As discussed in last week’s commentary, ICE GO cracks and spreads have largely continued their downward trend this week, although the crack has found somewhat of a floor, partly due to factors in the crude market discussed earlier.  

(Sparta Live Curves)

August’s HOGO swap and Houston to Barcelona & Rotterdam MR freight rates and US crude intakes (EIA data via Sparta)

The ICE GO spread has similarly stabilised, primarily because the USGC TA arbitrage has closed due to increased USGC freight rates following an uptick in TC14 and the widening of the HOGO over the past week, despite US crude runs and diesel stocks remaining robust. 

Jubail to Rotterdam LR2 (via Cape) freight rates. (Freight Calculator)

Reducing AG to Europe freight rates have shifted AG diesel cargoes towards Europe rather than East, which should lead to increased diesel supplies from the AG to Europe.  

Saudi Arabian crude intakes (JODI data via Sparta)

This is further supported by the currently high crude runs in the AG region. Coupled with ongoing issues in European diesel demand, particularly in Germany, we maintain our bearish view on European diesel pricing.

The timing of the opening of the USGC TA arbitrage to Europe will be crucial, a factor that can be closely monitored via the Sparta Commodities platform. 

European and German gasoil/diesel demand (JODI data via Sparta)

In summary, despite some stabilisation in cracks and spreads, the overall bearish sentiment remains due to increased diesel supply from the AG and persistent demand issues in Europe.

The upcoming maintenance period in September could alter this outlook, but until then, we expect European diesel prices to stay under pressure. 

August’s NWE jet CIF diff and spread. (Sparta Live Curves)

As discussed in last week’s commentary, “This development has helped jet fuel prices find a floor.

This recovery is expected to persist until these arbitrages reopen.” NWE jet differentials and spreads have indeed stabilised this week.  

Rotterdam & New York. (Sparta Global ARBS – Pricing Centre)

Asian arbitrages to Europe remain closed, prompting us to maintain a neutral to bullish view on European jet pricing.

However, it is crucial to monitor the narrowing margins of these arbitrages to the USAC, a task made easier by the Sparta Commodities Platform.  

US jet yields (EIA data via Sparta)

These margins have been decreasing due to record jet yields and high US crude runs, which limit the US’s capacity to import external jet fuel, potentially increasing the supply to Europe. 

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

As discussed in last week’s commentary, “Considering these factors, we maintain a neutral to bearish view on US diesel pricing going forward.” HO cracks and spreads have largely continued their decline this week, though the crack has found somewhat of a floor for reasons previously mentioned.  

By Delivery Date; Americas. (Sparta Global ARBS – Pricing Centre)

Continuing attacks on Russian refineries may offer some “relief” for Latin American shorts. Coupled with escalated freight rates from Asia to Latin America, this has positioned the US as the most cost-effective diesel supplier to Latin America.  

US diesel stocks and demand (EIA data via Sparta)

However, the overall bearish outlook is reinforced by the closed arbitrage to Europe and increasing diesel stocks due to high crude runs and poor diesel demand.

Consequently, we maintain a bearish view on US diesel pricing. 

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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