The market turns increasingly bearish, whilst the medium term outlook has some positivity, but will we need run cuts as an additional solver?

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

As highlighted in last week’s commentary, the shift of diesel cargo flows eastward rather than towards Northwest Europe has added to the bearish shadow over the Singapore market, with diesel cracks and spreads declining sharply in the past week.

Singapore Middle Distillate Stocks (Enterprise Singapore data via Sparta)

Singapore’s middle distillate stocks appear to have reached a ceiling, but high runs (and high middle distillate yields) in the Arabian Gulf and West Coast India are expected to continue until their maintenance periods, maintaining pressure on the market.

By Origin Dashboard. (Sparta Global ARBS – ARBs Comparison)

With marginal arbitrages still favouring Eastward flows, the short-term outlook for Singapore diesel remains bearish. The looming East Asian maintenance period alone may not suffice to rebalance the market, especially given persistently weak Chinese demand and now flagging growth in Indian diesel demand.

Seasonals; September’s Sing 92 crack. (Sparta Historical Forwards)

The ongoing decline in East Asian diesel cracks, coupled with similar downtrends in gasoline and other product cracks (excluding naphtha), reignites the discussion of potential run cuts in the medium term, with recent signals from Taiwan and China further supporting this.

Far East Medium Refinery Margins. (Sparta Global ARBS – ARBs Comparison)

According to our Crude vertical, both simple and medium East Asian margins have come under increasing pressure over the past one to two weeks, increasing the number of discussions regarding possible run cuts.

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

ICE gas oil cracks and spreads have notably declined in response to recent market selling, with a marked decrease in prompt rather than deferred spreads.

This downturn is driven by two key factors: the significant influx of diesel and gasoil into Europe this August, being one of the largest since the imposition of Russian diesel sanctions in February 2023, and largely from the US Gulf Coast and East Coast, alongside mounting concerns over European diesel demand.

ICE GO Future Structure (current versus 1 month ago). (Sparta Historical Forwards)

On a more positive note, with maintenance season approaching across major regions—including NWE, USGC, USAC, PADD 2, the Arabian Gulf, West Coast India, and East Asia—and funds having reached bearish extremes, combined with seasonally increasing Atlantic Basin diesel demand as we move further into winter 2024, this could present an opportune moment to adopt long positions.

NWE Medium Refinery Margins. (Sparta Global ARBS – ARBs Comparison)

Mirroring trends in East Asia, European simple and medium refinery margins have turned negative recently, sparking discussions of potential run cuts, particularly among less complex refineries.

However, any rally over the coming month to six weeks may provide a timely opportunity to sell once more.

US middle distillate yields. (EIA data via Sparta)

The broader outlook remains bearish for diesel pricing in the longer term, driven by sustained high supply levels (and yields) across Europe, the US, and Asia, outside of maintenance periods.

Additionally, the ongoing ramp-up of Dangote and Dos Bocas refineries (utilisation appears to be rising in the latter) contribute to a potentially bearish scenario for diesel, especially as we approach the end of Q4.

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

In line with the recent trends observed in ICE gas oil, HO cracks and spreads in the prompt market have reacted to last week’s sell-off, with US managed money diesel positions shedding four million barrels.

However, winter and spring 2025 spreads have shown resilience, posting gains over the past week.

US crude intake. (EIA data via Sparta)

Economic concerns and lingering demand issues, coupled with the partial recovery in US crude runs, have contributed to a bearish short-term outlook.

Yet, there are limited but notable reasons suggesting that this could be an opportune moment to re-enter the market.

The USGC and USAC are gearing up for turnaround season, albeit on a smaller scale than in 2023, with significant works planned at refineries such as Lake Charles, Garyville, Ponca City, and Pasadena in September and October.

US gasoil/diesel demand. (EIA data via Sparta)

Additionally, US diesel and general distillate stocks are on a declining trajectory as we approach the peak diesel demand period in October and November.

However, as with the European market, any potential recovery is expected to be largely rangebound and limited, reflecting broader structural increased supply challenges and a cautious market sentiment.

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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