The ongoing contest for the most cost-effective arb into Singapore now includes AG, which has emerged alongside South Korea and West Coast India (WCI).
This shift has been spurred by AG’s reduced premia, hitting its lowest level since mid-June 2023. Moreover, the copious availability of LR2 vessels in AG/WCI has driven down freight rates to their lowest point since July 2023, notably at $22.37/mt for Jubail to Singapore routes.
Despite these favourable conditions, the ME’s potential to resupply Singapore is dampened by the widening November MOPAG / SG 10 spread, marking its broadest since July.
Singapore’s current weakness, reflected in Singapore’s middle distillate stocks moving to their highest level in 2 years this week, is also evident in the recent movement of November’s SG regrade, which briefly surpassed parity for the first time since May 2023.
November Singapore gasoil cracks and spreads have remained stable in the past week but have been steadily declining since early October.
Similarly, December’s E/W, holding at -$18.50/mt since late October, has trended towards narrowing since mid-September.
While AG arbs continue directing towards Europe and the West, WCI arbs for 2024 loaders continue pointing East.
Europe’s current lack of demand for these cargoes should persist in the short to medium term, exerting narrowing pressure on the E/W, barring some observed arbs to New York from Asia due to low PADD 1 stocks.
Currently, Europe is experiencing continuing relative gasoil weakness, evident in the Nov/Dec Swap Spread, which has declined from +$20 to +$8.75/mt since early November and from +$28/mt since October’s commencement.
November cracks also dwindled from +$34.75 to +$24.5/bbl over the same period. However, within Europe, the ARA region remains a pocket of strength as gasoil stocks continue to decrease, moving this week again past their lowest level since December 2022.
There are continued reports of gasoil shortages in Southern Germany which may yet draw more tonnage up the Rhine and out of ARA.
Despite ARA’s strength, European gasoil stocks overall remain healthy. Marginal supply from East of Suez is on the horizon, highlighted by the continual reduction in AG premia.
Arbs into Europe are open primarily at the very front, reflecting scarcity only within the ARA region. Interestingly, there appears to be a trade here, possibly indicating that ARA barge differentials are currently overvalued and might move closer to cargoes as Europe overall doesn’t face significant supply issues at present.
Given these circumstances, the downward pressure on cracks and spreads is expected to persist in the medium term, primarily due to the overall health of European stocks and limited open arbs indicating no critical supply problems in the region.
Currently, the US Gulf Coast (USGC) stands as the primary source into Northern Brazil, yet faces competition from Asian origin barrels into the rest of East Coast South America (ECSAM) and West Coast South America (WCSAM).
The challenge posed by Asian barrels correlates with decreasing FOB premia in Asia and the return of Russian gasoil into these regions.
Furthermore, the US continues to exhibit a disparity in stocks between the USGC and PADD1. This is highlighted by the ongoing widening of the USGC 10 diff, reaching its widest position in at least four years.
Pressure to export has resulted in full capacity on the colonial pipeline 1, leading to +4.75 cpg premiums to secure space on line 2 and decreases in waterborne premia to 0.5 cpg currently.
US Gulf MR freights have surged significantly in recent weeks, with Houston to Rotterdam MR freights escalating from $24.01 to $39.34/mt over the past month.
These circumstances are likely to exert pressure, causing the Heating Oil Gasoil (HOGO) to widen and driving appreciation on Heating Oil (HO) spreads in the medium term.
Already, AG and WCI arbs briefly opened to New York in parts of the previous week, indicating the growing need for external resupply in the USAC.
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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