Demand destruction seems to be putting a ceiling on global jet, if anything diesel is increasingly becoming the issue!

Commentary summary:

• USGC MR ULSD arbs close to Europe and point to Brazil/Latam. Whilst WCI jet arbs open to Europe and North Asian jet arbs open to the USWC.

• Singapore diesel and jet pricing largely weakens with diesel finding a floor.

• EU and US diesel pricing continues to gain whilst their jet pricing finds a ceiling.

• US jet stocks looks surprisingly healthy whilst US diesel stocks even in PADD 3 start to really struggle.

• The issue is increasingly moving more and more to diesel away from jet. Though to be clear the jet crisis is not solved.

(May’s Singapore diesel crack and spread)

Singapore’s diesel market appears to be finding its footing after a fortnight of steady decline, with spreads stabilising since the start of this week and cracks actually posting gains — a combination that may be the early signal of a renewed period of strength in regional pricing as the bite of refinery run cuts begins to be felt in earnest.

This also speaks to the entire crude and refined product market putting more risk on as the ceasefire/talks continue to falter.

The backdrop is one of considerable structural adjustment.

Chinese oil majors, in a move described by traders as highly unusual, have been offloading cargoes of West African and other crudes as government-owned refiners reduce utilisation rates in response to the upheaval in global supply wrought by the Iranian conflict.

South Korean refiners, buoyed by substantial imports of US crude, are currently running at stronger rates; but that resilience may prove temporary.

(May’s Singapore and South Korean diesel premia)

Singapore and South Korean diesel premia have similarly found a floor over the past week, lending further weight to the view that the worst of the sell-off may be behind us.

(May’s GO and Jet E/W)

The May GO E/W has broadly tracked the decline in Singapore spreads over the past fortnight, though it too has stabilised since Monday.

(Sikka LR2s: Diesel)

West Coast India ULSD LR2 cargoes continue to point eastward over westward into Europe, but the arbitrage margin gap has narrowed considerably, which carries an important implication: Singapore diesel pricing needs to continue recovering from here simply to keep inbound supply flows commercially viable.

(May’s Singapore kerosene spread and crack)

The jet market, meanwhile, is telling a somewhat different story. May Singapore kerosene cracks and spreads, particularly the latter, have fallen sharply over the past week, in what may reflect the early fruits of demand destruction: flight cancellations and government intervention appear to be cooling regional jet consumption.

(May’s Singapore regrade and Jet E/W)

The Singapore regrade has followed, and the combined effect of a weaker regrade, a softer East-West spread (and a firmer HOGO which we will discuss in more detail in the US/EU section below) has been sufficient to crack open West Coast India jet arbitrages into Europe and North Asian jet routes into the US West Coast. (Though WCI Jet LR2s continue to point East over West).

The consequence has been a ceiling of sorts on European jet pricing and premia, with demand destruction on both sides of the Atlantic compounding the supply-side shift.

(May’s NWE jet CIF differential, spread and crack)

(May’s Rotterdam and Los Angeles jet premia)

It is a development that will bring some relief to airlines and consumers; but it should not be mistaken for a resolution.

Pre-crisis pricing levels remain a distant prospect, and the structural deficit at the heart of the global jet market is far from solved. There is, bluntly, no supply fix in sight.

(May’s ICE GO spread and crack)

The collapse of Middle East ceasefire talks has provided fresh fuel to an Atlantic diesel market that needed little encouragement, with May ICE gasoil cracks and spreads posting strong gains over the past week as the prospect of a negotiated resolution receded once more.

(May’s HO spread and crack)

(May’s HOGO swap, USGC diesel & jet differential and TC14 freight rate)

Heating oil cracks and spreads have followed, with the crack outpacing the spread; and both the May HOGO and USGC diesel differential have surged in a manner that leaves little ambiguity about where the real stress in the American energy complex now lies.

The issue in the United States, increasingly, is diesel and not jet.

(EIA via Sparta)

(EIA via Sparta)

That distinction matters, and the mechanics behind it are instructive.

American refinery yields for both products are running at very strong levels, and domestic demand for each appears, for the moment, largely insulated from the broader turbulence in global markets.

(EIA via Sparta)

(EIA via Sparta)

(EIA via Sparta)

(EIA via Sparta)

What separates the two is the question of whether those yields are sufficient to absorb the record export volumes now departing US shores.

For jet, the answer is, just about, yes — yields are strong enough to accommodate the extraordinary export demand without meaningfully depleting domestic inventories.

For diesel, the arithmetic is less comfortable. Yields are good but not exceptional, and the near-record pace of US diesel exports is carving visible and accelerating draws from stocks across PADD 2 and PADD 5.

(EIA via Sparta)

Most pressingly, PADD 3; the Gulf Coast, which is the engine room of American diesel exports, is seeing inventories fall to very low levels indeed.

(May’s USGC jet and diesel differential)

The divergence is written clearly in the relative moves of USGC jet and diesel differentials over the past week. Jet arbitrages from the Gulf Coast into Europe remain open; diesel arbitrages do not.

(Houston: Diesel)

Compounding the problem is a growing pull on American diesel from Latin America, where continuing attacks on Russian refining and port infrastructure have intensified Brazilian and wider regional demand for US barrels; and where Gulf Coast exporters are currently finding better netbacks than the transatlantic route offers.

The direction of travel, on both sides of the Atlantic, is towards higher diesel prices. The only real question is how quickly the market gets there.