Russian diesel export issues have come on top of Iran crisis induced low diesel stocks to continue to strengthen global diesel pricing

Deep Dive Summary:

• USGC MR ULSD arbs remain closed into Europe. AG/WCI ULSD and jet LR2 arbs remain open to Europe.
• The GO e/w remains at record lows whilst the HOGO remains at record highs.
• Russian refinery runs are so low that they have reduced diesel exports and even started to import jet fuel.
• It remains difficult to not be long global diesel currently, whilst jet has more of a bearish argument.

(August’s Singapore diesel crack and spread)

(August’s Singapore diesel crack)

Singapore’s diesel market has extended its remarkable run over the past week, with Aug/Sep spreads and August cracks both gaining further ground.

Both derivatives have now moved back to the very top of their seasonal maximums, outdoing even 2022, the year against which every distillate dislocation of the modern era is measured.

(August’s GO e/w)

Yet the more arresting move has come in the August GO e/w, which has declined dramatically over the week under the weight of the real strength seen in ICE gasoil.

The spread now sits within the lowest 1% of values recorded over the past 10 years, an extraordinary statistical position that speaks to just how ferociously European pricing has outpaced its Asian counterpart.

(Sikka LR2s: Diesel)

The arb implications are unambiguous. AG and WCI ULSD LR2 cargoes now clearly point West over East, and are open into both NWE and the Med.

In the medium term, that westward flow should cap further gains in ICE gasoil spreads, though the short term feels bullish given the ongoing issues with Russian diesel exports, a subject addressed in more detail in the Europe and Americas section later.

The same dynamic should also be expected to put a floor under any further declines in the GO e/w: the barrels are now moving, and the spread has arguably done its work.

(August’s Singapore kerosene spread and crack)

(August’s Singapore regrade and Jet e/w)

The kerosene picture is one of relative, though only relative, calm. Aug/Sep Singapore kerosene spreads and August cracks have both slipped slightly over the past week.

Both remain at the top of their seasonal maximums giving a clear indication that the problems afflicting global jet supply are by no means solved. The market has softened at the margin; it has not healed.

(Rotterdam: Jet)

(Los Angeles: Jet)

With diesel’s strength outpacing jet’s, the August Singapore regrade has weakened over the week, and that softening has been enough to open AG and WCI LR2 jet arbs into Europe. Those flows should continue to weigh on NWE jet pricing in the sessions ahead.

(August’s ICE GO spread and crack)

On the US West Coast, the story is a familiar one. The weakness in the Singapore regrade continues to help open East Asian jet arbs into the USWC, and Los Angeles jet premia should therefore be expected to remain under sustained downward pressure.

(August’s ICE GO swap spread)

(August’s HO spread and crack)

The relentless ascent of European gasoil shows no sign of pausing for breath. Aug/Sep ICE gasoil spreads and August cracks have gained reasonably dramatically over the past week, with both moving to the top of their seasonal maximums, again overtaking even 2022, the benchmark year for distillate distress.

(August’s HO spread and crack)

(August’s HO spread and crack)

Across the Atlantic, the picture is more nuanced but scarcely more comfortable. Aug/Sep HO spreads have traded flat over the week, perhaps reflecting the small builds in US diesel stocks recorded over previous weeks, though those inventories remain historically low by any honest measure.

August HO cracks, meanwhile, have gained over the period, and both measures have moved back to the top of their seasonal maximums. The flat spread is a pause, not a retreat.

(August’s HOGO swap, USGC diesel differential, TC14 freight rate and RVO)

The August HOGO has actually narrowed over the past week, though it too remains at its seasonal maximum, a reminder that the softening is one of degree rather than direction.

That narrowing has combined with slight gains in the August USGC diesel differential and the current strength in TC14 freight rates to keep the USGC MR ULSD arb into Europe firmly closed.

(Rotterdam: Diesel)

Therein lies the crux of the matter. Europe’s principal transatlantic resupply route remains blocked at precisely the moment its own pricing is testing seasonal extremes, and with Russian export volumes still diminished, the supply-side arithmetic offers little prospect of near-term relief.

It is, in the circumstances, hard not to maintain a continuing bullish call on ICE gasoil spreads, in the short term at least.

The market has repeatedly punished those who called the top prematurely, and nothing in this week’s data suggests that lesson has lost its force.

About the Author
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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