USGC supply dominates an exacerbated European short, WCI primary for Singapore, as refinery issues cut supply in the European continent 

This week, the USGC has overtaken the the Red Sea as the primary source of ULSD resupply into Europe, with 3 LR1s and 4 MRs fixed along this route in the last few days.

However, USGC MR freight rates have since increased from WS 115 to 160 on the back of this demand, effectively closing the arb again. If as expected, this arb is going to continue to flow, a continued narrowing of the HOGO will be necessary.

Nonetheless, AG/Red Sea arbs continue to point to Europe, while WCI barrels have shifted back to the Singapore region, decreasing TC5 freight rates doing much of the work here.

Whilst there are ongoing demand concerns in the region, ARA gasoil stocks have decreased again this week, reaching their lowest level since 2022 on top of issues with the Shell Pernis CDU since last Friday.

July MED diffs have increased again this week, surpassing $17/mt, highlighting the real shortage of supply in the Mediterranean, a situation is expected to partially reverse shortly as EoS arrivals into Europe in July reportedly outperform June. 

Whilst US ULSD stocks have remained at the lower end of their five-year range, the USGC ULSD differential has continued its downward trajectory, falling from -7 to -8 cpg over the past week. 

This combined with a narrowing HOGO spread over the past week, from +20 to +18 cpg, has positioned the USGC as the most cost-effective point of resupply for Europe over most of the past week. 

Similarly, the USGC has emerged as the most appealing source for Northern Brazil and challenges Far Eastern refineries into WCSAM, despite the recent surge in USGC MR freight rates. 

Southern Brazil currently relies on WCI LR vessels as the optimal supply source partially due to decreasing WCI FOB prices on the back of subdued demand expectations at the start of monsoon season.

Into Argentina, despite elevated FOB prices in Europe, the ARA region competes with AG and WCI barrels, on the back of low NWE to ECSAM MR rates, currently at WS 133.

Aug/Sep HO spreads experienced a decrease from +1 to +0.6 cpg this week whilst Aug HO cracks remained mostly stable, at their highest level since March 2023.

As the US is content with maintaining low stocks due to the currently backwardated market, continued pressure on USGC differentials and a narrowing HOGO will be necessary to incentivize exports.

WCI has emerged as the most cost-effective option for supplying Singapore, surpassing South Korea in this regard.

Several factors have contributed to this shift:

Firstly, as mentioned earlier, WCI FOB prices have declined.

Secondly, the July E/W spread has surprisingly narrowed from +11.25 to +9.75 USD/MT over the past week. This unexpected trend could be attributed to recent arrivals of EoS and US resupply into Europe, and the European continent’s reduced need to build stocks due to the market’s backwardation.

Lastly, South Korean FOB prices have increased partially due to the announced end of the country’s tax reduction scheme for transport fuels and its effect on domestic demand. 

As discussed in previous articles, Chinese gasoil and jet fuel exports are expected to rise into the end of July and August, adding further pressure on Singapore sales prices.

Additionally, reports indicate a continued increase in Singapore MD stocks this week.

Both the July/Aug SG 10 spreads and SG 10 cracks, rising from +$19.5 to +$20.25bbl, have shown positive gains over the past week.

However, considering the additional pressure from WCI, South Korean, and Chinese gasoil arrivals, along with rising stocks, it is expected that the pressure on the E/W spread will be to likely widen in the short to medium term. 

The Asian jet fuel market is experiencing a favourable situation for supplying Europe currently, with all major sources, except South Korea, currently appearing as open arb opportunities. 

The Aug NWE jet diff has risen from $50 to $55.50/mt over the past week whilst reports indicate that there is a reduced availability of handy cargoes for jet fuel, driving up the demand for external jet fuel resupply into Europe.

Although European jet spreads for July and August have decreased from $12.5 to $5.75/mt in the past week, there is no dampening of Europe’s current demand for jet fuel.

The widened jet E/W spread is expected to continue in order to encourage more jet fuel resupply to Europe in the short to medium term.

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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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