Diesel unlikely to build enough before September’s global turnaounds, jet regrade looks relatively less strong

Deep Dive Summary:

• USGC MR arbs closed to Europe and pointing to Latin America. WCI ULSD LR2 arbs point East whilst those of jet point West.
• Global diesel spreads find a very high ceiling whilst Singapore regrade declines.
• The Houthis announce an embargo on Saudi tanker exports.
• It’s hard not to be bullish everything, but the HOGO and regrades feel like they have a bearish turn coming.

(August’s Singapore diesel crack)

(August’s Singapore diesel spread)

The twin hammers of Middle Eastern escalation and Russian refinery outages have driven Singapore’s diesel market to unprecedented heights. As discussed in last week’s commentary, August Singapore diesel cracks and Aug/Sep spreads have gained over the past week, the double whammy of military escalations, with the Houthis now threatening Saudi exports over the last day or so having broken a four-year truce with missile fire, and reduced Russian refinery runs really taking their toll.

Both the crack and the spread have moved to their highest numbers recorded in at least the last 10 years. This is no longer a market flirting with records; it is setting them.

(August’s GO E/W)

The August GO E/W tells a more subtle story. Whilst it remains within the bottom 2.5% of its widest values of the past eight years, it has actually narrowed over the previous week and that has been enough to point WCI ULSD LR2s East over West once again.

(Sikka LR2s: Diesel)

(Arbs into Singapore: Diesel)

This may offer some relief to the Singapore and East Asian diesel complex, where all major diesel arbs are currently closed into Singapore.

Physical markets confirm the strain: regional traders report cargo offers simply vanishing this week, with nothing forthcoming even from Reliance, whilst China, its crude imports collapsing, has warned private refiners against fuel exports.

So much of the current situation depends upon a resolution to the Middle East crisis, and we do not seem to be there yet. It feels difficult not to remain long Singapore diesel spreads and cracks from here, although the caveat of SPR releases of crude and diesel, with talk of another IEA emergency release growing as flat price climbs, hangs over everything.

(August’s Singapore regrade and jet E/W)

The jet market has followed, though with less ferocity. August Singapore kerosene cracks and Aug/Sep spreads have generally increased over the week, the crack sitting at its highest value of the past 10 years and the spread within the top 2.5% of the same range.

(August’s Singapore regrade)

Yet as the declines in the August Singapore regrade attest, jet has lagged diesel, and the regrade now sits at a very typical number.

(Rotterdam: Jet)

The general strength in Asian jet pricing (exemplified by the gains in the jet E/W over the past week) is nonetheless closing most of the major jet arbs into Europe, apart from WCI and Red Sea loaders.

(US arbs remain closed into Europe despite the weakness in the USGC jet differential, which has been unable to overcome the strength in the HOGO).

(August’s NWE jet CIF differential)

As such, we should expect the Singapore regrade to decline from here in order to reopen those arbs, though in the short term this points to more positivity in European jet pricing.

(August’s ICE GO spread and crack)

Europe’s gasoil complex is holding its historic altitude even as the momentum shifts beneath it.

As discussed in last week’s commentary, August ICE gasoil cracks have increased over the past week, whilst Aug/Sep spreads have traded generally flat, though both sit at the very top of values seen over the past 10 years.

(August’s HO crack)

It is a similar story with August HO cracks and Aug/Sep HO spreads, likewise perched at 10-year extremes.

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

The relative weakness has clearly been stronger in HO than ICE gasoil, as evidenced by the declines in the August HOGO, though it too sits at the very top of its 10-year range.

(EIA via Sparta)

(EIA via Sparta)

(EIA via Sparta)

US diesel stocks have been building over the past six weeks or so, courtesy of increased diesel yields, reduced demand and reduced diesel exports; the latest EIA data nonetheless show total distillates at just 103.6 million barrels, and the stock picture now, as at the start of the second phase of this crisis, remains extremely low.

Even the August USGC diesel differential has been gaining as PADD 3’s own stocks have declined, and the extra pull from Latin America in the absence of Russian diesel, with Turkey and Brazil now competing for the same non-Russian pool, will also be significant.

(Rotterdam: Diesel)

The extreme height of the RVO remains a positive for US diesel exports, but it is not enough to overcome the strength of the HOGO, TC14 freight rates and, increasingly, the USGC diesel differential to open the USGC MR arb to Europe.

The HOGO will need to continue coming off to make that arb workable. Even Yanbu LR2 ULSD arbs are flirting with closure into Europe, and that corridor sits under direct threat from Houthi attacks after missiles were fired at Saudi Arabia this week, breaking a four-year truce.

It is very difficult not to form a bullish view on ICE gasoil spreads from here, although the caveat of SPR releases of diesel and crude must be mentioned, with talk of another IEA response growing. There is, though, a real shortage of refining capacity globally.

(August’s RBHO swap)

(August’s Eur GOFO)

Both RBHO and GOFOs have been doing all they can to maximise diesel production over gasoline and fuel oil, visible in the US yield charts, and whilst this has delivered healthy US jet stocks, it is unclear how much more the US has to give in diesel exports.

On top of this, a large period of global turnarounds approaches from September, colliding with high natural gas prices and fuel oil vying for gasoil molecules.

Will we build enough diesel stock ahead of that and the winter of Q1 2027? It seems highly unlikely. There is a clear trade on Q1 cracks and structure.

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: LinkedIn

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