Despite increasing FOB prices and diesel differentials in the US Gulf Coast, only the TA diesel arbs from the USGC and EC Canada remain open into ARA, with the TA arbs also being the best placed into the Mediterranean.
This is due in large part to the continuing weakness of USGC MR and TC 14 freight values, which are currently at their lowest level since the end of January.
All EoS arbs are currently closed into ARA & the MED, with MED ULSD diffs at their lowest since Summer 2022. Europe’s typical first point of supply since before the Russian sanctions, the Red Sea, currently points at East and South Africa.
The LR2 SKS Doda has been fixed along this route and is loading shortly. WCI and AG arbs both currently point away from Europe to Singapore. However, the recent moves of European spreads into contango have incentivized bringing EoS diesel to Europe via the Cape. The VLCC Maran Danae, currently loading, is believed to be fixed to follow this route.
Attention must be paid here to the current economic negative picture (i) the Australia central bank having surprisingly increased interest rates this week, with the ECB and Fed expected to follow suit shortly, (ii) crude oil prices having fallen of late under pressure from short selling due to these macro worries and (iii) continuing worries about Atlantic basin diesel demand on the back of US land freight volumes slowing.
Three factors are important here (i) ARA gasoil stocks having fallen to a 13-week low from their elevated pre-Russian sanction levels, (ii) rumours of German diesel demand having surprised to the upside of late with the MR Uog Kyma having been fixed to fill this short from the USGC recently, and (iii) reduced re-supply from closed EoS arb.
As a result, we should expect to see some positive moves in European gasoil spreads and cracks in the short to medium term, if only in comparison to the EoS region, which should widen the E/W if AG/WCI cargoes are once again to point to Europe.
The US Gulf Coast (USGC) is currently best positioned to supply diesel to its typical markets of East and West Coast South America.
Despite the increase in USGC 10 diffs and FOB prices, the availability of cheap MR freight has allowed USGC diesel to compete effectively. This has offset the falling FOB prices and freight prices in the AG and WCI markets, AG diesel premiums having fallen close to a 1 year low.
However, it is important to mention here that hidden diesel barrels from Russia into ECSAM are curtailing the volume of diesel Brazil needs to source from the international market, contributing to Petrobras reducing ex-refinery diesel prices this week by almost 10% in order to compete.
The support from USGC MR rates heading into WS double digits was easily broken over the last week. However, this fall has since slowed down, and further downside should be limited.
The European market is becoming an attractive option for ballasters in terms of demand and returns, and a discounted voyage from the USGC to WCSAM is also an attractive option for MRs looking to benefit from the currently tight Far-East Asian market, according to our in-house Freight Commodity Owner David Thwaite.
If David’s prediction is accurate, USGC differentials will face increasing pressure over the short to medium term if they are to continue supplying their LatAm outlets. This should result in a narrowing HOGO and a further resultant opening of the TA arb.
Recent developments in the Asia-Pacific diesel market show that WCI diesel currently lands more competitively into Singapore than its typical supply points of Taiwan and South Korea, as the maintenance period in East Asia comes to an end.
Both AG and WCI diesel barrels currently point to Singapore due to the narrow E/W. Whilst it is also important to mention the sure to increase, as their logistics improve, Eastern Russian ports exported gasoil.
However, Singapore middle distillates stocks are continuously falling, and Chinese May gasoil export quotas are expected to be much lower than April.
Jet regrade has moved to almost parity with gasoil indicating that a higher proportion than normal of these MD stocks could be gasoil. However, this is more probably due to pent up jet fuel demand as China reopens after covid.
Overall, as the weight of these AG/WCI volumes landing into Singapore becomes apparent in the weeks ahead, the relative centre of pressure should shift from Europe over to Singapore, in turn opening up the E/W again towards the end of Q2 in order to relieve some of the pressure on the EoS balance.
James Noel-Beswick is Commodity Owner for Sparta. Before joining Sparta, James worked as an analyst for likes of BP and Shell, and leads our continued development of the distillate product vertical.
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