ICE GO has likely done enough now, though Mid East and Russian “issues” remain!

• USGC MR diesel arbs to Europe are almost open, whilst WCI ULSD LR2, despite narrowing GO e/w, point firmly West into Europe.
• Sing diesel and ICE GO spreads and cracks continue their climb whilst HO spreads and cracks decline but remain at close to record elevation.
• Ukranian drone strikes move further and further into inland Russia refineries.
• ICE GO spreads to find a ceiling, though not to fall much more.

(October’s Singapore diesel crack)

A ceiling has emerged in the October Singapore diesel crack, but what a ceiling it is. At close to record levels, the marker is being propelled, or perhaps more accurately held in place, by the escalations in both the Middle East and Russia.

Yet as my colleagues Abhishek Kumar and Carrie Ho point out, the strong expectation for increased Chinese diesel and jet exports into September and October may also have contributed to the plateau.

(Oct/Nov Singapore diesel spreads)

Oct/Nov Singapore diesel spreads, meanwhile, have continued their upward movement.

(October’s GO e/w)

Reflecting this strength, the October gasoil East/West spread, as my colleague Jay Maroo predicted last week, has finally found a floor and gained over the period.

(Sikka LR2s: Diesel)

It remains, nonetheless, historically very wide, and even though the arb margin difference has narrowed, West Coast India ULSD LR2 arbitrages still point decisively westward into Northwest Europe over heading eastward into the Singapore region.

That lends weight to my continuing bullish view on the East/West spread from here; though Abhishek and Carrie disagree, citing those expectations for Chinese export growth.

disty 1009 image 5.png (Singapore: Diesel)

My own conviction rests also on the fact that most regional diesel arbitrages remain firmly closed into Singapore, a structural tightness that underpins a bullish view on Singapore diesel cracks, spreads, and the interregional differential.

The current prices for crude, including Dubai, are very high and could lead to concerns of East Asian crude availability, lending further weight to my argument. However, Abhishek and Carrie’s stance is an important caveat to consider and could well prove correct.

(October’s Singapore kerosene spread)

(October’s Singapore kerosene crack)

In contrast, October Singapore jet kerosene cracks and Oct/Nov spreads, though still very elevated and particularly the crack, have slipped over the past week. The spread has felt the move more keenly, drifting below 2022 and 2023 comparison levels.

(October’s Singapore regrade)

The softening is equally visible in the steady decline of the October Singapore regrade, which has now held below the very average/normal -$2/bbl mark for some time.

(Rotterdam: Jet)

(Los Angeles: Jet)

The consequences for arbs are stark. Practically every major Asian-loading LR2 jet arbitrage into Europe is now open, joined by MR routes from Asia into the US West Coast.

(October’s NWE Jet CIF differential, spread and crack)

As a result, even with European jet prices having popped higher over the past two days, we maintain a bearish view on the European jet complex from here, with the regrade likely to lead cracks and spreads lower in sympathy with the push from East of Suez.

The influence of those open MR arbitrages on Los Angeles jet premiums is clear, with the downturn there set to extend into at least the medium term; and with the start of East Asian kerosene heating season likely to provide a floor here via reduced jet exports to the US West Coast.

(October’s LA jet and diesel MR premia)

Notably, and in marked contrast, LA diesel premiums continue to rise even with Asian and USGC arbitrage routes into the US West Coast open.

(EIA via Sparta)

The broader tightness in US distillate inventories, particularly in PADD 5 where stocks have languished below their five-year range for three straight weeks, appears sufficient to overpower the theoretical pressure from those inbound cargoes. It is a dynamic that we are watching closely.

(October’s ICE GO spread and crack)

The relentless climb in European gasoil spreads have, so far, shown little sign of pausing for breath.

Oct/Nov ICE gasoil spreads have continued their upward march, propelled still by the escalations in both Russia, where drone strikes on refineries and export terminals have intensified, and in the Middle East, where the Hormuz Strait remains practically shut with traffic having slid to just six vessels a day against a pre-war norm of over 100.

The pace of the rise this week has not quite matched last week’s surge, but the direction is clear. October gasoil cracks have largely followed, driven by the same geopolitical pressures, with the attacks on Jizan paramount here.

(Oct/Nov HO spreads)

(October HO cracks)

The transatlantic picture is more nuanced. Oct/Nov heating oil spreads and October cracks have actually declined over the past week, with the increase in PADD 3 diesel stocks to their highest level in four to five weeks, built on the back of heavily reduced exports, particularly to Europe, appearing to be the key driver.

(PADD 3 diesel stocks: EIA via Sparta)

(US total diesel stocks: EIA via Sparta)

Yet for all the regional replenishment, the overall position of US diesel inventories remains perilous in practically every other PADD. Heating oil cracks and the HOGO have pulled back in line with PADD 3’s resupply, but all three markers remain at extraordinary levels in any historical context.

(October’s HOGO swap)

The combination of that HOGO decline, the continued slide in USGC diesel differentials as PADD 3 stocks have climbed and the offsetting rise in European diesel pricing has been enough to almost reopen the USGC MR diesel arbitrage into Europe; though how much more the US has to give is now a real question.

With Sikka ULSD LR2s still pointing decisively westward and a growing flow of Dangote-loaded cargoes arriving from West Africa, there is a credible argument that ICE gasoil spreads have now done enough on the upside and should find a ceiling here.

(Rotterdam: Diesel)

That view is not without risk. The continued escalation in Russian drone attacks on critical infrastructure and the dragging stalemate in the Middle East are serious caveats, more so with an impending wave of refinery turnarounds looming on both sides of the Atlantic.

If those run cuts bite into already-thin inventories, particularly distillate stocks across the US Midwest and East Coast, then the ceiling for European spreads may be more distant than our balances currently suggest. It is a tension the market is acutely aware of.

We are now lightly short the Oct/Nov ICE gasoil spread at $72/mt, with a target of $62/mt. A sharp drop in PADD 1 distillate stocks, or in ARA gasoil inventories, would force a rethink of that bearish structure call.

The path of least resistance remains higher, but the conviction that the pace of gains will now slow is firming.