Diesel is unarguably bullish in all markets, whilst global jet regrades remain bearish

Deep Dive Summary:

• USGC MR arbs closed into Europe whilst Asian MR (and USGC MR) diesel and jet arbs closed into the USWC.
• All Asian jet LR2 arbs open into Europe.
• All global middle distillate spreads and cracks gain over the past week on the back of geopolitics. All global regrades decline with FOGOs and RBHO following.
• Interestingly the GO e/w narrows but remains historically wide.
• There is pretty much no argument against staying long diesel spreads and cracks whilst that strength should add to a bearish global regrade trade!

The gasoil/diesel complex is combusting. Any notion that diesel had found a ceiling, however elevated, has been dynamited by the escalations in the Middle East, from the Houthi incursions along the Red Sea coast to Saudi Arabia’s East-West pipeline attacks, the rising tensions between Iran and the US, and, lest we forget, Russia’s extension of its diesel export ban through October.

Calling the top of this market, even from record heights, has proven a widow-maker trade.

(October’s Singapore diesel spread and crack)

(October Singapore diesel crack)

Both Oct/Nov Singapore diesel spreads (+$3.5/bbl on the week) and October Singapore diesel cracks (+$15/bbl) have erupted to higher levels.

The crack now sits at its highest level in at least the past 10 years, surpassing even the earliest days of the Feb/March crisis.

(Oct/Nov Singapore diesel spreads)

The spread is second only to that chaotic period over the same horizon.

(October’s GO and Jet e/w)

(October’s GO and Jet e/w)

The GO e/w has surged in tandem, narrowing by over $20/mt on the week even as European pricing has rocketed higher in lockstep; though it remains historically wide, as does the jet e/w.

(Ulsan LR2 diesel & jet premia and Singapore LR2 diesel and jet premia)

As my colleague Carrie Ho note earlier this week, the impact is visible across physical markets with regional diesel premiums bearing the brunt of the rally and outpacing jet.

(Singapore: Diesel)

Despite Singapore itself now at an extraordinary premium, regional diesel arbitrages into the city-state are welded shut.

(Sikka LR2s: Diesel)

One consequence of a narrower GO e/w has been to reorient WCI ULSD LR2s firmly eastward over westward. In any normal market that would presage a coming ceiling on Singapore pricing.

Yet with the Middle Eastern escalations careening from dire to catastrophic, and Hormuz traffic still running nowhere close to pre-war norms, it would take a brave soul indeed to stand in front of this rally and short. As we noted last week, the path of least resistance remains higher.

(October’s Singapore kerosene spread and crack)

The jet complex is singing from a slightly different hymn sheet. Whilst Oct/Nov Singapore kerosene spreads and October cracks have also jumped, with spreads notably returning to the top of their seasonal range, the October regrade has plunged by almost $2/bbl on the week and sits only above the 2020 and 2022 comparison levels.

(October’s Singapore regrade)

The September regrade looks still worse, falling through -$10/bbl. Healthy US jet inventories have compounded the pressure.

(Rotterdam: Jet)

The relative softness has been sufficient to fling open every major Asian (and US) jet arbitrage into Europe, with South Korean exports running at their fastest pace since 2022.

(Los Angeles: Jet)

(Los Angeles: Diesel)

That East-of-Suez weakness has not, however, been enough to overcome the firmer GO e/w and easing HOGO of the past week, even as both jet and diesel arbitrages from Asia into USWC have slammed shut.

PADD 5 jet stocks look comfortable for now, but diesel inventories there sit at multi-year lows. An upward jolt in Los Angeles diesel premiums looks nigh on inevitable.

(EIA via Sparta)

(October’s Los Angeles diesel and jet MR premia)

(October’s ICE GO spread and crack)

The gasoil complex is repricing for Armageddon. Oct/Nov ICE gasoil and heating oil spreads have surged over the past week, propelled by much the same factors that have lit a fire under Singapore diesel: the escalations in the Middle East, from the Houthi incursion along the Red Sea coast to the Saudi pipeline attacks and the simmering US/Iran tensions, layered onto Russia’s extension of its diesel export ban through October.

Both European and American diesel spreads have leapt to levels exceeded over the past decade by only the mayhem of March 2026.

(October’s HO spread and crack)

The European and US cracks have moved in even more dramatic fashion, rising to heights not merely above last March but unprecedented in any history I have known.

This is the realisation of the diesel market’s worst-case scenario, a subject I explored at length in episode 107 of our Sparta ‘Trade with Conviction’ podcast on 21 August.

The supply impact is compounded by the onset of seasonal refinery turnarounds across the US, Europe and Asia; maintenance that operators will surely seek to minimise where feedstock permits, but which still stands to ratchet an already-brittle balance even tighter.

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

The October HOGO tells the story starkly. For all the perilous state of US distillate inventories, with aggregate stocks languishing at just 106 mb, some 21 mb below the prior five-year average for this point in the year, and retail diesel prices surging as a result, the collapse in the HOGO (down 6 cents per gallon on the week) reveals that Europe’s shortfall is running ahead of America’s.

The October contract has now fallen, in seasonal terms, below even the shortage-racked prints of 2022 and 2023.

(Rotterdam: Diesel)

Yet that crumbling HOGO, married to a still-wide USGC diesel differential (PADD 3 inventories holding out as the lone domestic bastion of adequacy), has not been enough to overcome a spike in TC14 freight rates to levels not rarely seen even since the earliest days of the Mideast crisis, only beaten in mid-April, early June and early August.

The USGC MR arbitrage into Europe remains shut, in the near term at least. Indeed, for prompt loading dates, the sole open inbound route into Europe is from Eastern Canada — and the Saint John refinery there is, until mid-October, in turnaround.

With WCI ULSD LR2s pointing east, global run cuts looming, and the Middle Eastern and Russian disruptions not merely unresolved but intensifying, it is all but impossible not to hold a bullish view on ICE gasoil and heating oil structure and outright prices even at these dizzying altitudes.

The one caveat is refinery yield flexibility: as 2026’s spring meltdown demonstrated, operators can, up to a point, pivot molecules towards jet and diesel at the expense of other streams. But with crude flows choked to a trickle, the scope for such alchemy this time around is distinctly limited.

(EIA via Sparta)

We remain long the Oct/Nov ICE gasoil spread at $80/mt, now targeting a retest of $92/mt with a stop at $70/mt. A confirmed prompt US distillate build that brings stocks above or close to seasonal averages or any firm increase in PADD 1 would force a rethink of that European/US bullish view.

But as refined product prices firmly take over from crude as the binding constraint on demand, the path of least resistance remains grimly, vertiginously higher.