The short term appears decidedly bearish, but could Q3 global maintenance and somewhat improving demand be enough to turn around an ailing distillate market?

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

Singapore diesel cracks and spreads have largely continued their downward trend this week, though both have found somewhat of a floor in recent days.

Contributing to this stabilisation is the onset of the Autumn maintenance period in East Asia, with Taiwanese refiners CPC and Formosa announcing shutdowns this week. Additionally, the loading of the Sea Lion VLCC with diesel in the East Asian region is notable.  

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

The GO E/W has continued to widen in the prompt (less so further down the curve), and although AG/WCI freights to Singapore have decreased, they have dropped in tandem with but to a lesser degree than, AG/WCI freights to Europe.

Consequently, AG/WCI arbitrages remain oriented westward rather than eastward, potentially offering relief to the Singapore diesel market.  

September’s Rotterdam sales price and Ulsan and Mai Liao FOB price for LR2s. (Sparta Live Curves)

Whilst European sales price premia have continued to decline, major East Asian diesel exporters’ FOB price premia have begun to increase from a floor, indicating regional maintenance activities.

This increase may also be a response to the recent reduction in regional freight rates.  

Singapore Middle Distillate Stocks (Enterprise data via Sparta)

Additionally, Singapore middle distillate stocks appear to have peaked in recent weeks and are expected to decrease moving forward.

Given these factors, we maintain a neutral to bullish view on Singapore diesel pricing in the medium term.

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

However, the current (perceived) weakness in the global economy and Chinese diesel demand may continue to exert some influence in the very short term.

As we discussed in last week’s commentary, “the combination of low European demand and increased arrivals from the AG, India, and the US continues to paint a bearish picture for European diesel pricing”, ICE GO cracks and spreads have continued their decline this week, with the persistent ICE GO selling indicating that the market also perceives weakness as we navigate the typically lowest European diesel demand period of the year.

The recent stock market declines and the arrival of another diesel VLCC further contribute to this bearish sentiment. 

September’s USGC diesel differential. (Sparta Live Curves)

However, it is crucial to consider the medium-term outlook. Whilst AG/WCI arbitrages continue to point westward, and the USGC differential remains at its seasonally widest as USGC refiners aim to export.  

August’s HOGO swap, RVO and Houston to Rotterdam & Barcelona MR freights. (Sparta Live Curves)

Although the USGC arbitrage has closed recently due to a reduction in RVO despite a narrowing HOGO and reduced TA freight rates, two LR2s have been booked to move ULSD from the USGC to Europe in August.

Part of the picture here must be the ongoing weakness in New York cash and the probable closure of the colonial diesel arb. 

 Compounding this are reports of financing issues at Dangote, potentially affecting the startup of their secondary units and crude purchases.

Although Dangote have recently purchased a Brazilian crude cargo indicating the intention is to try to start cracking heavier molecules shortly.  

Additionally, both NWE and East Asia are set to enter their largest turnaround periods in six years during September and October, with significant maintenance planned in the AG/WCI and USGC regions at the same time. 

European diesel/gasoil demand (JODI data via Sparta)

As we transition out of August, European demand typically improves as we approach winter, suggesting a potential shift in the market.

Consequently, despite the current bearish trends, we hold a slightly bullish view for European diesel pricing in the medium term as we move towards the end of Q3 and the start of Q4.  

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

As discussed in last week’s commentary, “Nevertheless, with crude runs remaining high and US diesel demand continuing to struggle, our bearish outlook on US diesel pricing persists,” HO cracks and spreads have largely continued their decline this week, although both have found a bit of a floor in the last couple of days.

The persistent weakness in NY cash remains an issue, but a few medium-term positive signs are emerging.  

US crude runs and diesel demand (EIA data via Sparta)

US crude runs have begun to decline in an unseasonably typical way, due to a number of unplanned outages and may have some limited potential upside before the maintenance period starts in September, whilst diesel demand appears to have moved above 2023 levels for the first time this year. 

By Origin Dashboard; Houston. (Sparta Global ARBS – Dashboard)

Vessel tracking data indicates that, although Russian diesel exports increased in July and early August, less of this flow has headed to Latin America compared to previous months.

In fact, our By Origin dashboard shows that USGC arbitrages currently get their best netbacks by heading to Brazil and Argentina, with some of these arbitrages appearing open at present. 

Furthermore, the start of USGC turnarounds, though at lower levels than last year (for now), will commence in Sep-Oct.  

 While the very prompt outlook remains bearish, the selling of US diesel paper in the market has ceased this week.

Thus, the medium-term outlook for US diesel pricing appears neutral to bullish, with the potential for recovery as market dynamics shift. 

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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