Medium-term ICE GO call arrives on schedule; Europe still shut to every diesel arb bar the Red Sea, so HOGO remains a sell

Last call status: correct. October ICE GO cracks and Oct/Nov ICE GO spreads have largely continued to gain since the start of September, as outlined in our 27 August commentary, “Our medium-term bullish call on ICE GO spreads arrives, whilst we remain short global jet regrades”. This strength has, of course, also been propelled by the escalation in attacks and military activity in both the Middle East and Russia, with Russia now extending its diesel export ban to 30 September and this week seeing the highest diesel margins on record.

The US has diverged. October HO cracks and Oct/Nov HO spreads, though still very elevated seasonally and historically, have actually declined over the same period. US diesel stocks remain well below five-year lows, but the latest EIA statistics showed a build in PADD 3 ULSD stocks, in large part due to reduced exports. The October HOGO mirrors this picture: still very elevated, but lower over the period. The October USGC diesel differential has also widened, another sign of rising PADD 3 and USGC stocks, though these stocks remain historically low.

None of this has been enough to open USGC, USAC or EC Canada diesel arbs into Europe, at least not in the prompt. Michael Ryan’s (Analyst) freight brief had Houston to Rotterdam briefly open at around +$14.75/mt for September loaders at the start of the month, but flagged that TC14 had room to rally to roughly WS 250 before the trade shut on freight alone, and that is broadly where TC14 has since gone. The window, in other words, opened and closed within the week.

October Singapore diesel cracks and Oct/Nov Singapore diesel spreads have more closely tracked ICE GO and are also historically very elevated. Yet Singapore has strengthened more, as the movement in the October GO e/w shows: after the September contract plunged to around -$107/mt at the start of the month, per June Goh’s (Senior Oil Market Analyst) cross-barrel brief, the e/w has found a floor and gained. This has been enough for Singapore to overtake Mediterranean destinations for LR2 arb netbacks from WCI, with the margin between NWE and Singapore narrowing dramatically.

We therefore have every diesel arb into Europe closed apart from Red Sea LR2s, and Houthi attacks at Jizan, whose 400 kb/d refinery remains somewhat under threat, are unlikely to help in that regard. As such, we remain bullish ICE GO spreads and cracks from here. This should also be reflected in a bearish call on the HOGO: Europe needs to price up to pull in US diesel barrels.

On the GO e/w, an honest split. In this morning’s trading analyst meeting, Abhishek Kumar (Senior Oil Market Analyst) and I disagreed on the call from here. My view is that Singapore should price up to pull WCI ULSD LR2 barrels East, making me bullish the GO e/w. Abhishek’s view is that rising Chinese distillate exports into September and October will be the decisive factor. Carrie Ho’s (Senior Pricing Analyst) Asia update lends his side some weight: FOB Northeast Asia premia for prompt September diesel cargoes eased last week as more Chinese offers emerged, even against a broadly strong market. His view forms a fair caveat to mine, and it is the swing factor to watch for as we move closer to October.

(Sikka LR2s: Diesel)

(EIA via Sparta)

(Rotterdam: Diesel)

(October’s GO e/w)

(October’s HOGO swap)

About the Author
James Noel-Beswick | Head of Commodities, Sparta Commodities
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.
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