Whilst at record global diesel strength levels, we remain bullish, but the HOGO and GO e/w still need to move down more though. SPR releases the solver?

Deep Dive Summary:

• All diesel arbs and most jet arbs shut into Europe, whilst North Asian diesel arbs are workable into Singapore.
• Global diesel and jet spreads, and cracks go through the roof, regrades falter.
• Is there any way to solve the tensions/military escalations in the Middle East?
• It’s hard to not be bullish everything, also deferred cracks, but US regrades, Sing regrades, the HOGO and GO e/w look like sell trades!

(August’s Singapore diesel spread and crack)

Asia’s diesel market has entered a curious holding pattern at an extraordinary altitude. Aug/Sep Singapore diesel spreads have been very flat over the past week, whilst the August crack has continued to gain, reflecting the mounting pressure on global diesel stocks and supply: military escalations in the Middle East, Russian refinery outages, doubts over Chinese product exports and stubbornly low US inventories.

(Aug/Sep Singapore diesel spread)

Let us not understate matters however. Both the spread and the crack sit at almost unprecedentedly high levels.

(August’s GO and Jet e/w)

Yet the uptick in Singapore and East Asian diesel pricing has been markedly less extreme than that of ICE gasoil, as evidenced by the extreme widening of the GO e/w over the week.

(August’s GO e/w)

That spread now sits at an almost unprecedentedly wide level. Interestingly, the jet e/w, whilst also widening over the period, has jumped in the past few days, though it too remains at an almost unprecedentedly wide level.

(Singapore: Diesel)

(Sikka LR2s: Diesel)

North Asian diesel exports look workable or close to workable into Singapore, and despite the width of the GO e/w, Sikka LR2 ULSD arbs still point East over West. Continued widening pressure on the GO e/w should therefore be expected from here.

The Chinese question sharpens that view: with crude imports collapsing and Beijing having warned private refiners against fuel exports, the relief valve that would ordinarily temper Asian tightness looks unreliable.

(August’s Singapore kerosene spread and crack)

The kerosene picture largely mirrors that of diesel. Aug/Sep Singapore kerosene spreads have been similarly flat over the past week, whilst the August crack has followed the diesel one upwards.

(August’s Singapore regrade)

The decline in August’s Singapore regrade, however, indicates that East Asian diesel is tightening faster than jet, with the regrade now at a very normal number. The August USGC jet differential remains historically wide.

(Rotterdam: Jet)

That regrade weakness has not been enough to overpower either the HOGO or Asian diesel strength sufficiently to sustainably open most major global jet arbs into Europe.

Only Red Sea LR2s hold the line, and that corridor is itself under threat following Houthi missile fire at Saudi Arabia this week, which broke a four-year truce.

(August’s NWE Jet CIF differential)

A rebound in European jet pricing, specifically the NWE jet CIF differential, should therefore be expected in the short to medium term. One caveat: the end of peak European aviation demand is approaching.

(Los Angeles: Jet)

(LA diesel and jet MR premia)

On the US West Coast, the weakness in the Singapore regrade (and width of the GO e/w) has been sufficient to reopen East Asian jet arbs into the region. The recent gains in Los Angeles jet premia should consequently find a ceiling in the short to medium term.

(August’s ICE GO spread and crack)

The scale of last week’s move in European gasoil defies easy comparison. Gains in Aug/Sep ICE gasoil spreads and August cracks have been frankly extraordinary: the spread has practically doubled, whilst the crack has gained over $10/bbl.

The drivers are by now familiar, low US diesel stocks, Russian refining outages and, perhaps most importantly, the renewed escalation in the Middle East. The only real bearish factor in the market is low water levels on the Rhine.

(Aug/Sep ICE GO Swap)

Both instruments now sit at practically unprecedented levels, not merely for the summer, but even set against the worst winters on record. Bloomberg’s headline this week, that US and European fuel markets are flashing record tightness, required no embellishment.

(August’s HO crack)

Aug/Sep HO spreads and August HO cracks have largely followed, to sit at unprecedented levels.

(August’s HOGO swap)

The reasonably dramatic declines in the August HOGO nonetheless indicate that diesel tightness remains worst in Europe, though the HOGO itself remains historically wide.

(EIA via Sparta)

The latest EIA data show total US distillates at just 103.6 million barrels, with the Gulf Coast drawing even as PADD 2 builds, and this is relative comfort rather than genuine surplus.

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

Practically every component of the USGC MR arb has moved to make it more closed this week, the HOGO excepted: increases in TC14 freight and decreases in the RVO.

The rise in European sales prices and the width of the USGC diesel differential has not been enough to overcome those factors. Houston to Rotterdam screens firmly negative on MRs, and American swing barrels are finding better clearing outlets in Brazil, where Houston into Sao Luis and Santos turn positive through August.

Every cargo drawn into Latin America, competing against the hole left by Russia’s diesel export ban, is one fewer available to relieve Europe.

(Rotterdam: Diesel)

The USGC MR arb therefore joins practically every major global diesel arb in being closed and pointed away from Europe. Even Yanbu, the standout positive route into Rotterdam, sits under threat after Houthi missile fire at Saudi Arabia this week broke a four-year truce.

With global turnarounds approaching, and colder temperatures, high natural gas prices and fuel oil competing for gasoil molecules from September, there seems little to stop the upward march of European and Atlantic basin diesel pricing beyond SPR releases.

As our head of research put it last week, borrowing the German “Super-GAU,” we are approaching worst-case diesel scenarios, with flat price increasingly required to do the heavy lifting of demand destruction.

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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