Distillates strength pulls further ahead after a short breather, as tightness looms ahead; jet looks more comfortable

After a brief pause last week, the strength in distillates cracks and spreads regained momentum. Be it on gasoil cracks, ICE GO spreads, or the SG 10ppm E/W, the major price indicators across the distillates complex once again highlight west of Suez market tightness. Irrespective of the back and forth around a Hormuz peace deal, global refinery output (and therefore diesel supplies) remain constrained, with Russian export bans and refinery outages the clearest drivers providing structural support to prices West of Suez.

• Hormuz talks remain unresolved and keep flipping on and off week to week; Iran reportedly shifting toward a more offensive military posture means it is more likely that risk premiums sustain rather than subside.
• Houston-Rotterdam diesel is only open at the very prompt, and turns negative quickly further down the curve, while arbs from Sikka are far from open (excluding Med): very cautiously bearish on SG 10 E/W.
• In contrast, jet arbs to NWE are still attractive, supporting a bearish view on NWE jet CIF diffs.

Both OPEC’s MOMR and the IEA’s August report flagged the same thing this week: Atlantic Basin middle distillate cracks and refining margins are at record or multi-year highs. At its core, this is a product supply story, not a crude story. The world needs to refine more diesel, but refinery outages are not helping this. PRefChem’s RFCC unit at Pengerang is down, MRPL has a CDU and a hydrotreater offline for three weeks, Saudi’s Jazan restart just slipped from mid to late August, and Ukraine hit two more Russian refineries this week on top of that. The IEA is explicitly citing Middle East product export disruptions plus the Russian refinery attacks for a further 370 kb/d cut to their Q3 2026 global refinery run estimate.

So with that in mind, it is little surprise that ICE gasoil cracks are so strong. Even ICE gasoil prompt spreads, though not at their very peak, are still exceptionally high.

(ICE September gasoil/Brent crack and timespread)

Looking deeper below the headline figures for cracks and spreads, the picture on arbitrage margins also supports European pricing going forwards.

(Diesel arbitrage margins into Rotterdam)

Houston-Rotterdam MR margin is +$5.53/mt for September loading, the only positive print on the curve, but that is sharply down from $30/mt seen earlier this week. Further down the curve, the arb quickly flips negative to -$16/mt in October and weakens even more in November. Expectations of a seasonal pickup in PADD 1 distillate demand (heating) are likely preventing USGC-Rotterdam arb opportunities in the winter.

Meanwhile all of the other major arbs (Sikka, Yanbu) into Rotterdam are also closed until at least December, underlining my concern for North West European supply, with seasonal heating demand and winter spec availability a key risk in Germany, Europe’s largest diesel consumer.

From the perspective of exports, looking at Sikka arbitrage margins, it’s also very one-sided. Aliaga is the only prompt arb destination with a positive margin, and that too with only a narrow window of opportunity. The ongoing (and now extended) Russian diesel export ban, along with limited CPC crude supplies, is likely hurting Turkish supply especially, and so the country is needing to price higher to attract cargo. This is also feeding through into the wider Med trade – e.g. Fos is the next “best” arb outlet from Sikka.

(Diesel arbitrage margins from Sikka)

When comparing Sikka economics for NWE (via Cape) vs Singapore, the difference in the margin, even though both are negative, is very narrow. But when you take into account the option of taking the more risky route via Suez, the balance tilts marginally to the west. This tells me we could continue to see tankers from WCI to Europe move vs Bab el Mandeb, though this risk can flare up at any moment.

Looking further eastwards, arbitrage margins for bringing diesel into Singapore remain negative across the board. On a landed value basis, Far East supplies are the cheapest delivered barrel into Singapore, and remain so through to the end of the year. Sikka does not offer much competition for prompt cargoes and only begins doing so for December delivery.

(Diesel landed values into Singapore)

After considering the closed arbs into Singapore, and the current lack of strong arbitrage into NWE, I am very cautiously holding the view that SG 10 E/W could have room to still go a little weaker.

Yes, on a seasonal basis the September contract is at all-time lows, but if more diesel does need to price to go west, then maybe there is room for a little more weakness. Freight is another factor too. If the Suez Canal route is avoided more than it is already, E/W may need to fall further to offset the longer route (and higher cost via timespreads). A somewhat contrarian trade, with a fair amount of risk, but if US supplies are not flowing to Europe, those from the East need to flow more to compensate. And maybe we have more Chinese supplies incoming that can depress that East-leg further.

(SG 10 E/W could still fall further)

Turning to jet, and the arbitrage picture is very different from a West perspective. Sikka cargoes to Rotterdam still yield a margin of $38/mt even with the retracement from recent weeks. Sikka arbitrage to Rotterdam only really weakens from December, which makes sense as Asia kero pricing (again seasonal heating driven) is priced in as a stronger regrade deeper into the winter.

Similarly, USWC arbitrage opportunities from Asia still look good with the economics quite close between Singapore and Ulsan, reflecting a looser jet market East of Suez.

(Jet fuel arbitrage margins from East into Rotterdam and into Los Angeles)

Given all of the above, our previous call (see last week’s Distillates Deep Dive), bearish NWE jet CIF diffs, is a view I now hold with even stronger conviction. Arb margins for jet and diesel into NWE are running opposite to one another while demand patterns (summer air travel now fading) suggest weaker jet fuel prices.

(NWE jet CIF diff)

About the Author
Jay Maroo | Head of Product Experts, Sparta Commodities
Jay Maroo is the Head of Product Experts at Sparta Commodities covering cross-barrel global analysis. Having previously held senior roles at Brevan Howard and Vortexa, Jay is experienced in oil & shipping markets research and building analytics capabilities across global teams.

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