GO E/W has room to weaken, though Asian and European runcuts complicate the picture, the HOGO is nearly out of “weakening space”

Commentary summary:

• USGC diesel and jet arbs open into Europe. US diesel exports close to and US jet exports at record levels.

• Global diesel cracks and spreads weaken over the last week whilst those of jet continue to largely gain.

• Continued warnings of EU jet fuel shortages/disruptions within weeks not months.

• The GO E/W to continue to weaken whilst the HOGO should find a floor within the next 2 or 3 weeks.

Singapore’s diesel market has found a hard ceiling over the past week, with spreads, cracks and regional premia all softening; a development that, on closer inspection, owes more to a confluence of temporary supply fixes and behavioural shifts than any genuine structural improvement.

(May’s Singapore diesel spread and crack)

The context is provided by Sparta’s Singapore-based Senior Pricing Analyst Carrie Ho, whose on-the-ground assessment is illuminating; The cargoes booked frantically from Europe and the United States at the outset of the conflict are now arriving in April, providing a short-term cushion.

Floating cargoes have also emerged on the spot market, released by receivers unable to meet margin calls on their letters of credit.

South Korean sellers have resumed spot sales, buttressed by a government pledge to refrain from imposing export restrictions; a signal that has done much to prevent the kind of panicked hoarding that could have driven prices still higher.

Meanwhile, China and Japan have been quietly moving cargoes to developing country allies through government-to-government channels. The cumulative effect has been a meaningful cooling of urgency among buyers.

(May’s Singapore and South Korean LR2 diesel premia)

Demand destruction and hand-to-mouth purchasing have become the dominant modes of market behaviour, and the steep backwardation across the forward curve has become a source of genuine anxiety.

Buyers who cannot clear April cargoes before the month turns face the prospect of painful losses selling downstream on a May basis, creating pressure either for deep discounts on remaining prompt barrels or a deliberate decision to defer purchases until May itself.

(May’s GO and Jet E/W)

The May GO E/W has followed spreads and cracks lower over the week, and with North Asian ULSD arbitrages appearing open or close to open into Singapore, the directional pressure on the East-West continues to point towards further weakness.

(Sikka LR2s: Diesel)

West Coast India LR2 ULSD loadings remain eastward-bound for now, until early autumn load dates, whilst North Asian ULSD loaders are workable into Singapore.

An argument for continued weakening in the GO E/W is therefore emerging; though it would be premature to assume a one-way move.

Asian refinery run cuts are already underway (and to be fair, also European cuts), and as margins compress, the resulting reduction in product supply will likely put a floor under the GO E/W, perhaps not immediately, but increasingly so as we move into the medium term.

(May’ Singapore kerosene spread and crack)

(May’ Singapore regrade and Jet E/W)

The jet market, however, is telling a rather different story. May Singapore kerosene spreads and cracks have continued to gain over the past week, a divergence from diesel that is reflected in a firmer regrade and a strengthening Jet E/W.

(Rotterdam: Jet)

(EIA via Sparta)

(EIA via Sparta)

Asian jet arbitrages remain firmly closed into Europe and the US West Coast alike, and while USGC exports to Europe have hit their highest weekly levels since at least 2017, American jet stocks are now declining rapidly; suggesting that particular supply route has a limited shelf life.

(May’s USGC jet differential)

One important counterweight to the European jet bull case, however, is a notable recent softening in European jet premia.

Our contacts are blunt: “April European jet production is running at exceptional levels, leaving NWE temporarily oversupplied”. It will not last; but for now, it complicates the picture.

(May’s ICE GO spread and crack)

(May’s HO spread and crack)

The Atlantic diesel complex has been quietly surrendering ground over the past week, with May ICE GO spreads and cracks both moving lower; the crack more sharply than the spread.

HO spreads and cracks have declined still more dramatically in tandem.

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

The cumulative effect has been a continued weakening of the May HOGO, a move that carries a certain internal logic given the broader softening in transatlantic diesel sentiment.

(EIA via Sparta)

What makes it striking, however, is the context in which it is occurring: US diesel stocks are declining at a rapid clip, precisely the kind of fundamental backdrop that would ordinarily provide robust support to the HOGO rather than permit its erosion.

(Rotterdam: Diesel)

The market, it seems, has for now chosen to prioritise the opening of arbitrage economics over the signal being sent by the inventory data.

And those arbitrages have duly responded; the weakening HOGO has been sufficient to crack open virtually every major US-to-Europe diesel supply route, with the sole exception of USGC MR tanker loadings (TC14 freight rate escalations, despite the record number of MRs currently ballasting to the USGC, being the key culprit in this regard).

US diesel exports are, by consequence, running at very elevated levels.

The uncomfortable question hanging over this dynamic is one of sustainability.

The HOGO’s decline has served its purpose in redirecting barrels across the Atlantic (and globally in general), but with domestic American stocks falling as quickly as they are, the runway for further weakness looks increasingly narrow.

At some point, the inventory signal will demand to be heard.

When it is, the repricing could be swift; and European diesel buyers would do well not to assume the current flow of transatlantic supply can be taken for granted.