In some ways, global diesel is starting to become a larger issue than jet!

Commentary summary:

• All arbs into Europe closed in diesel, whilst only those from the US and WAF are open in jet.

• WCI ULSD and jet arbs continue to point East.

• Biggest gains seen in prompt Singapore diesel spreads, whilst all other global diesel and jet pricing remains somewhat flat but, of course, incredibly elevated historically.

• What is the solver for European jet supply into May and ahead of the summer holiday season?

Asian fuel markets are in the grip of a dramatic tightening that is sending shockwaves across global energy trading, with diesel spreads in Singapore staging a near-vertical ascent that has left market participants scrambling to make sense of the moves.

(April’s Singapore diesel spread, crack and LR2 premia)

April Singapore diesel spreads have essentially doubled over the past week, surging from around $25 per barrel to north of $52 per barrel. Cracks have followed in kind, mirroring the extraordinary gains in the underlying spread.

The move is not merely a paper phenomenon. Real-world supply constraints are already beginning to bite in Australia and across South-East Asia, a development that lends the rally a weight and credibility that short-term squeezes often lack.

(April, May, June, July and August’s GO E/Ws)

Perhaps the most striking barometer of this tightness is the April GO E/W, which has exploded by more than $180 per metric tonne over the past week alone to stand at a frankly extraordinary level of over $255 per metric tonne.

(April GO E/W)

(Sikka LR2s: Diesel)

At such levels, arbitrage flows are being forcibly redirected: North Asian diesel cargoes are naturally finding their way into Singapore, Chinese export volumes have visibly picked up, and West Coast India loadings on LR2 tankers are firmly oriented eastwards rather than towards Europe.

Though notably, these WCI ULSD arbs are closed in the prompt, indicating that Singapore needs to price up even more.

Notably, however, this ferocity in the prompt market does not extend further along the forward curve, where East-West spreads remain in negative territory.

One interpretation is that the market retains faith in a near-term resolution although that view looks increasingly difficult to sustain.

However, it is also a sign that we may be storing up a more serious supply problem for Europe further down the line.

(April’s Singapore kerosene spread and crack)

The picture for jet fuel is similarly elevated, though a widening discount in the Singapore regrade, now at minus $10 per barrel, suggests that, in the prompt, diesel has a more acute crisis.

(April’s Singapore regrade and Jet E/W)

Some of that softening likely reflects demand destruction in Asian aviation, but it would be a mistake to read it as a signal that jet supply pressures have abated.

(Sikka LR2s: Jet)

The jet E/W has firmed, although from a low base. Arbitrage flows continue to point resolutely eastward from West Coast India.

(April’s NWE jet CIF differential, crack & spread and Rotterdam LR2 jet premia)

In Europe, jet pricing remains stubbornly strong. Cargoes from the US Gulf and Atlantic Coasts, alongside a significant volume of Nigerian Dangote jet, are crossing the Atlantic to plug the gap (as Asian origin jet LR2 arbs remain firmly closed into Europe) Few though believe this will prove sufficient to arrest the upward march in prices.

(May’s LA diesel and jet MR premia)

(Los Angeles: Jet)

Meanwhile, on the US West Coast, elevated premiums for both jet fuel and diesel in Los Angeles have not yet proven sufficient to attract inbound arbitrage cargoes.

The concurrent declines in the HOGO and increases in the GO E/W spread have only compounded that difficulty, leaving the region to absorb its tightness without meaningful external relief.

(April’s ICE GO spread and crack)

European diesel markets are navigating waters that are, by any historical measure, extraordinary.

(April’s HO crack and May HO spread)

April ICE gasoil and heating oil cracks remain at levels that would have been unthinkable not long ago, and whilst spreads have traded relatively flat over the past week, that flatness should not be mistaken for calm. It is the stillness of a market already stretched to its limits.

(April’s HOGO swap, USGC diesel differential, TC14 freight rate and HO spread)

The April/May heating oil spread told a more dramatic story, declining sharply into its expiry yesterday. Taken together with the concurrent softening in the heating oil/gasoil spread, the message is pointed: the diesel dislocation wrought by this crisis is considerably more severe on the European side of the Atlantic than in the Americas. That is, for now, a meaningful distinction although not one that offers much comfort to European buyers.

(April USGC FOB diesel premia)

What makes the situation particularly vexing is the near-total closure of resupply routes into the continent. USGC diesel arbitrages into Europe have shut (due in large part to steep gains in FOB premia), joined by those from the US Atlantic Coast and Eastern Canada. Punishingly steep freight rates, themselves a symptom of acute vessel scarcity, have ensured that even where a theoretical price incentive might flicker into existence, the economics of moving barrels swiftly extinguish it.

(Rotterdam: Diesel)

Asian arbitrages into Europe are similarly closed, and West Coast India LR2 cargoes remain pointed firmly eastward, drawn by the extraordinary strength in the gasoil East-West spread.

The uncomfortable question, then, is where European diesel resupply will actually come from in the near term.

The honest answer is that nobody is entirely sure. Strategic reserve releases may provide some modest ceiling on the upside; but even that is uncertain.

With every conventional supply route effectively barricaded, a sustained period of elevated ICE gasoil pricing looks not merely possible, but close to inevitable.