Whilst East Asian diesel feels relatively flat, there appears to be some warranted optimism in ICE GO and HO

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Commentary summary:

• AG/WCI arbs largely continue to point East whilst the USGC arb is open into the MED and Latin America.
• Both the GO E/W (but not enough to point arbs West) and HOGO (only freight is keeping these arbs open to Europe really) have widened.
• Both the US and China have lowered interest rates in the past week in efforts to boost their respective economies.
• Neutral outlook for Singapore diesel whilst bullish ICE GO and HO complexes.

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

Singapore’s diesel market appears to have hit a ceiling this week as discussed in last week’s commentary “Consequently, an influx of diesel into Singapore is expected in the medium term, potentially capping further gains in diesel cracks and spreads”.

The recent announcement of China’s third batch of refined product export quotas has only reinforced this outlook, although doubts remain about how much of these quotas will be utilised given the current poor export margins.

October’s GO E/W and Jubail to Singapore & Rotterdam LR2 freights. (Sparta Live Curves)

While the GO E/W spread widened significantly at the start of the week, much of this has since recovered and AG LR2 freight rates have increased to both East and West locations—a trend our newly released freight vertical predicts will not continue as supply looks to outpace demand in the coming period.

Jubail LR2s. (Sparta Global ARBS – ARBs Comparison)

One notable development has been the rise in diesel FOB premia in the Arabian Gulf and West Coast India. Our price reporters have observed that the latest tenders from India have been higher, driven by concerns over reduced Chinese exports.

An Indian refiner has even been marketing winter-spec gasoil at over MOPAG+$2/bl, further buoying the market. Despite this, AG/WCI cargoes remain orientated East rather than towards North-West Europe.

There are better netbacks to the Mediterranean, however, partly due to reduced exports from Turkey amid turnarounds at the Star Refinery.

Looking ahead, the expectation of increased imports from both the Middle East and China suggests a likely decline in Singapore diesel pricing in the short to medium term.

However, the impact of ongoing run cuts, the financial instability facing Chinese refineries, and the Chinese economy in general, will be crucial to watch. Also, we should expect any positive signs in the West to eventually filter into the East, providing a floor, something we will endeavour to discuss below.

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

ICE GO and HO cracks and spreads have shown a modest rally over the past week, particularly ICE GO, as discussed in last week’s commentary; “with the market currently very short/bearish, reflected in heavy fund manager sales last week, the next fortnight could present a timely opportunity to get long ICE GO and HO.”

US Diesel Demand (EIA data via Sparta)

Seasonally increasing diesel demand in the US (there appears a particular issue with low stocks in PADD 5 currently), alongside the announcement of US interest rate cuts, has widened the HOGO spread.

However, the continued reduction in US Gulf Coast freight rates has kept the transatlantic arbitrage routes into the Mediterranean open and viable for refiners targeting North-West Europe. Our newly released Freight vertical predicts stability in USGC/TC14 rates in the coming weeks.

It should be mentioned here that our Freight Commodity Owner David Thwaite is not seeing many transatlantic vessel requests at present. He believes that owners currently prefer to head to East Coast Latin America as the TC2 market is so weak at present.

October’s HOGO swap and Houston to Barcelona, Rotterdam & Santos MR freight rates. (Sparta Live Curves)

Lower freight costs have also facilitated increased USGC diesel shipments to Brazil. Demand there has picked up this month, with a higher proportion of these cargoes also originating from the Arabian Gulf and West Coast India.

Meanwhile, evidence of refinery run cuts, particularly in Europe, coupled with ongoing maintenance—albeit lighter compared to 2023—suggests tighter supplies. Reduced arrivals from the Middle East, as more diesel flows eastward and to Latin America, alongside seasonal demand growth in the US and Europe, support a cautiously bullish outlook for ICE GO and HO cracks into the medium term.

Looking ahead, the situation becomes more complex as we approach the end of Q4. The ramp-up of operations at the Dangote and Dos Bocas refineries will increase supply just as seasonal demand wanes, potentially weighing on the market. The interplay between these factors will be crucial in determining the trajectory of distillate markets into 2024.

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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