Unless run cuts really manifest strongly, the diesel outlook is decidedly bearish whilst surging global freights close arbitrage opportunities

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

Singapore diesel cracks and spreads have maintained a generally flat trend since early May, with the maintenance period in the region tapering off as we move into June.

Consequently, a continued downward trend is expected, unless discussions about run cuts come to fruition in substantial fashion.

June’s GO E/W. (Sparta Live Curves)

Notably, as highlighted in our April 17th commentary, “This phenomenon is also reflected in the diverging changes in diesel premia between Singapore and Rotterdam in recent times.

Consequently, it is anticipated that the GO E/W spread will continue to narrow in the short to medium term.” Indeed, the GO E/W spread has narrowed significantly, from -$28/mt at the start of May to -$20/mt currently.

This shift implies that, for June and July loaders, WCI and AG diesel cargoes are more likely to head East.

However, the extent to which this flow can divert East instead of being term committed to Europe remains uncertain. With the MOPAG region in contango, stockpiling is also anticipated.

Rotterdam (VLCC & Suezmax arbs). (Sparta Global ARBS – Pricing Centre)

Market discussions have pointed to several VLCCs and Suezmaxes being loaded with gasoil/diesel in the Singapore region for westward movement.

Despite this, as the region emerges from turnarounds and additional AG/WCI diesel heads East, the market outlook remains bearish unless significant run cuts are observed.

The potential increase in supply from AG/India, coupled with existing conditions, underscores the likelihood of continued pressure on Singapore diesel pricing in the near term.

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

Since the start of May, ICE GO spreads have mirrored Singapore’s by remaining largely flat, whilst the ICE GO crack has been on a downward trajectory since mid-May.

Last week’s commentary highlighted the issue: “The weakness in ARA barge differentials signals a need to work through the surplus caused by significant diesel arrivals into Europe in April and early May.”

This backlog underscores the ongoing challenges in the European diesel market.

Barcelona. (Sparta Global ARBS – Pricing Centre)

As discussed, AG/WCI arbitrage flows are predominantly heading East and despite the surge in US crude runs, the USGC TA diesel arbitrage to Europe remains firmly closed.

July’s HOGO swap and Houston to Rotterdam MR WS rate. (Sparta Global ARBS – Pricing Centre)

This is despite the continued narrowing of the HOGO and the seasonally wide USGC diesel differential and primarily because of elevated USGC MR freight rates.

June’s TC5, TC7 & TC14 freight rates. (Sparta Global ARBS – Pricing Centre)

These high freight rates reflect a global trend affecting distillate arbitrages, with key distillate-related TC curves (TC5, TC7, and TC14) elevated and near record levels.

However, our freight commodity expert David Thwaite notes, “[these] are looking toppy to the market. TC5 balance month traded down 10 WS points yesterday from 215 to 205 and June TC14 traded at 202. With spot at WS250 and WS256 respectively, the markets are in backwardation in the short term, so we are expecting something to give.”

June’s MED and NWE diesel differential and West MED diesel premia. (Sparta Global ARBS – Pricing Centre)

The Mediterranean region is already feeling the effects of possible/anticipated reductions in diesel arrivals, with increases in diesel premiums and differentials surpassing those in North-West Europe for the first time this year.

This week also saw the announcement of the first Dangote jet cargo to Europe as the Nigerian refinery ramps up clean product production.

Given the concurrent emergence from turnarounds in both Asia and Europe, and the robust US crude runs, we maintain a neutral to bearish outlook on European diesel pricing.

The current issues with the Rhine and high-water levels add another bearish factor. However, as previously mentioned, monitoring potential run cuts will be crucial in the coming weeks.

July’s HO spread and crack. (Sparta Global ARBS – Pricing Centre)

Since mid-May, HO spreads and cracks have faced a steep downward trend, diverging notably from the more stable patterns seen in ICE GO and Singapore.

This decline is likely driven by the surge in US crude runs previously discussed.

Americas. (Sparta Global ARBS – ARBs Dashboard)

Concurrently, the USGC diesel differential remains wide, yet high USGC freights are challenging its competitiveness in Latin America.

This has allowed Asian and even European diesel arbitrages to penetrate the market, adding another bearish signal for US diesel pricing. The overall outlook for US diesel prices appears grim.

Rotterdam. (Sparta Global ARBS – Pricing Centre)

In the very prompt, closure of Asian arbitrages to Europe, due to the continued narrowing of the Singapore regrade, elevated Asia to Europe LR2 freights, and increased demand from the USAC, should stabilise and potentially uplift North-West Europe (NWE) jet spreads and differentials from here.

June’s NWE jet CIF diff and Spread. (Sparta Live Curves)

As European jet fuel demand rises, especially with the approach of the summer travel season, this should further support prices.