Despite slight builds in US diesel stocks, the argument remains for a strengthening HOGO

Commentary summary:

• ICE GO and HO spreads decline whilst cracks continue to gain.
• US diesel and jet arbs remain open into Europe whilst WCI diesel continues to point East.
• The fledgling signs/rumours of an Iran/US peace deal.
• Open diesel and jet arbs from the US with low middle distillate stocks feels unsustainable; we remain bullish the HOGO.

(June’s Singapore diesel spread and crack)

Singapore’s diesel market has spent much of the past week in a state of quiet consolidation, before a nascent peace deal between the United States and Iran, announced in the past day or two, introduced a fresh layer of uncertainty. June Singapore diesel spreads had been edging higher for most of the week before the diplomatic headlines knocked them back, whilst the crack, having gained over the seven-day period, similarly retreated in the final stretch.

(June’s GO and Jet E/W)

(June’s GO E/W)

The June GO E/W, meanwhile, has spent much of the week anchored at around minus $20 per metric tonne; a level that, strikingly, returns it to where it stood in late February, before the conflict reshaped the global energy landscape.

(Singapore: Diesel)

The broader picture on Singapore diesel is one of studied neutrality. Arbitrage margins from North Asia and West Coast India have improved over the week, though all remain closed into Singapore.

(Sikka LR2s: Diesel)

WCI diesel LR2 cargoes are increasingly pointing eastward, and with North Asian arbitrages close to workable, there is a reasonable argument that Singapore spreads and cracks, and the East-West spread, have done sufficient work for now.

(Enterprise Singapore via Sparta)

Middle distillate stocks in Singapore, having sat at multi-month highs in recent weeks, have come off their peaks over the past fortnight. The overall read is neutral to mildly bearish: the market has arguably repriced enough, and the directional flow of supply is shifting.

(June’s Singapore kerosene spread and crack)

(June’s Singapore regrade)

The jet market tells a more animated story. June Singapore kerosene cracks and spreads have both posted substantial gains over the past week, and the regrade has swung from negative territory at the start of the period to positive, recording a near $1.50/bbl gain; moving from around average seasonal values back to the top of its historical range.

(June’s USGC jet differential)

The June jet East-West spread has edged marginally higher in sympathy, and USGC jet differentials, after an extended period of decline, appear to have found a floor, even if they remain historically subdued.

(Rotterdam: Jet)

The arbitrage picture for European jet supply remains tight. All Asian loading routes are closed into Europe in the prompt and largely so into the medium term. Gulf Coast MR jet cargoes remain the sole open arb into the continent, although West Coast India jet loadings now point westward into Europe over eastward.

(June’s NWE jet CIF differential, spread, crack and LR2 premia)

European jet pricing should therefore continue to firm; though the gains are unlikely to be dramatic. Demand destruction has been considerable, and the United Kingdom’s announcement regarding the acceptance of Russian-produced diesel and jet will provide some ceiling on the upside.

(Los Angeles: Jet)

On the US West Coast, the recovery in the Singapore regrade has been sufficient to close, or nearly close, Asian jet arbitrages into the region, suggesting that West Coast jet premia are approaching a floor after a prolonged period of softening.

(June’s ICE GO spread and crack)

Jun/Jul ICE gasoil spreads have fallen sharply over the past week, caught in the crossfire of two significant developments: mounting signs of a prospective Iran-US peace deal, and the United Kingdom’s announcement that it stands ready to accept diesel and jet produced from Russian crude. Both carry genuine supply implications, and the market has wasted little time in pricing them in. Yet the picture is not one of unambiguous relief. The June ICE gasoil crack has gained over the same period; a quiet but important signal that the underlying problems afflicting global diesel supply are far from resolved. The spread may have retreated; the crack is reminding traders that the structural deficit has not.

(June’s HO spread and crack)

Heating oil spreads and cracks have broadly mirrored the ICE gasoil trend, with the spread in particular reflecting two consecutive weeks of modest builds in US distillate inventories; a development that owes more to softening American diesel demand and strong runs in the USGC.

(June’s HOGO swap, USGC diesel differential, and TC14 freight rate)

Both the June HOGO and the USGC diesel differential have, however, gained over the week, a testament to how thin domestic availability remains despite those tentative stock builds.

(Houston MRs: Diesel)

Critically, neither move has been sufficient to close transatlantic diesel arbitrages. Gulf Coast, US Atlantic Coast and even East Coast Canada loadings into Northwest Europe all remain open — a flow that goes some considerable way to explaining why ICE gasoil spreads have been under pressure.

The reach of USGC arbitrage economics extends well beyond Europe: cargoes are workable into East and West Coast Latin America, and even into the US West Coast on non-Jones Act vessels. With American diesel stocks still uncomfortably low and export demand showing little sign of abating, the HOGO looks set to continue finding support. The current moment of spread weakness may prove shorter-lived than the headlines suggest.

About the Author
James is Head of Commodities at Sparta, leading the distillates vertical and covering the full oil barrel. He held analyst roles at BP and Shell before joining Sparta, and his market commentary is regularly cited by Reuters, Bloomberg, Financial Times, New York Times, the Wall Street Journal, and BBC News.
Connect: https://www.linkedin.com/in/james-noel-beswick-506495bb/

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