Distillate, Oil Market Commentary

Asia Pacific gasoil weakness continues, jet takes front stage, US HO strength shows no signs of slowing  

Diesel; Singapore. (Sparta Global ARBs – Pricing Centre)

Our Singapore calculations reveal South Korean diesel arbs as the most cost-effective source of supply, marked by the continuous reduction in South Korean FOB premia since mid-September.

This echoes the broader weakness in gasoil across the Asia Pacific region. Singapore’s sales prices have plummeted from +$3/bbl, at the beginning of October, to -$0.4/bbl, while December’s Singapore crack descended from +$30 to +$24 /bbl over the same period, indicating sustained weakness. 

December’s Singapore Diesel Crack and Regrade. (Sparta Historical Forwards)

With Singapore’s middle distillate stocks hitting close to a 2.5-year peak and a decline in gasoil demand in the region, this prolonged weakness is expected to persist.

Despite falling LR2 freights in the West Coast India (WCI) region due to vessel availability, WCI arbs have weakened against South Korean arbs.

This decline is in large part linked to apparent stabilization in WCI FOB premia. 

Jet; Rotterdam. (Sparta Global ARBs – Pricing Centre)

The significant story in the Asia Pacific region revolves around the regrade in Singapore, December’s having soared from -$1.70, in late October, to +$0.70 /bbl currently.

This surge is attributed to early airline hedging, increased demand from Japan and the US West Coast, alongside a boost from rising global airline passenger numbers. Consequently, this rise has closed Asian and US arbs to Europe. 

European jet premia should be expected to improve moving forwardafter a downward trend since mid-September, as the region receives reduced supplies from East of Suez in the upcoming months. The arbs to Europe are in most cases over $10 /mt closed currently. 

Diesel; Rotterdam. (Sparta Global ARBs – Pricing Centre)

Currently, Europe is primarily open to diesel imports from East of Suez, specifically the Red Sea, WCI, and Arabian Gulf (AG). Market participants indicate the largest influx of WCI diesel arbs since 2017 are expected as we move into early December.

The attraction lies in the declining WCI premia since late September and the inherent desirability of these arbs for their cold-resistant properties, especially with winter looming. 

Jubail to Rotterdam LR2 Freight. (Freight Calculator)

The success of these East of Suez arbs can be attributed partly to the preceding weakness in AG/WCI LR2 freights. This weakness is exemplified by the Jubail to Rotterdam LR2 freights hitting their lowest point since early August. 

West Coast India. (Sparta Global Arbs Table View)

Simultaneously, ICE GO spreads and cracks have experienced a rally in the last 2.5 weeks due to depleted ARA stocks, a bid to entice diesel arbs with adequate cold properties and persisting supply and refinery issues in Southern and Central Europe.

This surge has prompted Q1 2024 WCI loaders to pivot back towards favouring West/Europe. 

Despite this upturn, this rally is likely to be only short term. The indication of closed arbs into Europe, except at the very front, and significantly reduced forward spreads in comparison to the very front, signal an anticipated downward trajectory in both cracks and spreads as Q1 2024 approaches.  

Americas. (Sparta Global ARBs – ARBs Comparison)

US Gulf Coast (USGC) diesel arbs face strong challenges in all their traditional markets. Far Eastern arbs have gained prominence in West Coast South America, while AG/WCI arbs have surged into East Coast South America.

The reasons behind this shift are multifaceted. Weakness in Asian FOB premia, as previously mentioned, plays a part, but the critical factor seems to be the current position of USGC MR freights.

For instance, USGC MR freight to Rotterdam has reached its peak levels since December 2022, driven by a remarkably low availability list. 

USGC MR Availability (From our Freight Commodity Owner Michael Ryan) 

Despite signals from the USGC 10 Diff, indicating a necessity for the region to export, the Trans-Atlantic (TA) arb remains firmly closed due to these high freight prices.

However, our analysis, by our freight commodity owner Michael Ryan, of MR availability suggests an impending shift in this freight position, as more vessels are becoming available. 

December HO cracks and spreads (Sparta Live Curves)

Both Heating Oil (HO) cracks and spreads have been steadily rallying since early to mid-October. This surge is attributed to consistently low stocks in PADD 1.

This trend is expected to persist as winter approaches, with the US likely to witness even lower overall stocks once exports from the Gulf Coast ramp up shortly. 

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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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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