Closed arbs into Europe appear unsustainable, with USGC and AG premiums softening 

Sales prices in WAF remain extremely strong, with demand in the region apparently supportive and typical supplies out of Russia having dried up, diverting other typical flows away as well.

It has taken strengthening sales prices to overcome higher freight rates on this route as well as robust fob prices which have remained around or above the $4/bbl mark out of WCI in recent weeks, even peaking around $6/bbl briefly.  

Looking East, the arbs into Singapore continue to point to Far East arrivals over flows out of the Middle East as a cheapest source of supply.

Although WCI arbs into Singapore also appear competitive vs barrels out of Taiwan or South Korea, in reality as we have seen above these WCI and AG barrels are currently pointing to the West, taking them out of the reach of the Singapore market for now.  

In the Americas, falling waterborne premiums in the US as well as a widening differential between the USGC 10 curve and the HO complex is pointing both ECSAM and WCSAM destinations squarely towards the USGC for resupply.

As we can see from the chart below of the history of these comparative landed values into Santos in recent weeks, the incentive to look to WCI or AG barrels for this route has been sharply corrected in favour of USGC barrels as the USGC 10 diff widened on increasing seasonal availability out of PADD-3.  

Such levels do point to an increased pull through the Colonial pipeline, however, and even on a waterborne arb USGC diesel is landing into New York only ~5-6cpg out of the money.

With arb opportunities now opening up both to Latin America and an increased push to place barrels into the Colonial pipeline, however, the USGC 10 diff should begin to narrow again in short order as demand to pick up barrels out of PADD-3 increases.

There has been some talk of USGC barrels opening up into Europe recently, but we are yet to see the arb become workable for November arrival.

December arrivals into Rotterdam out of the USGC are already almost in the money, and signs of improving sales prices in Rotterdam could see this arb opportunity opening before the end of the week.  

Indeed, with all arb windows into Rotterdam currently shut and the cold season in Europe just beginning, the E/W spread that has traded distinctly flat in recent days will need to widen further as well as European sales prices improving to generate new arb opportunities.

Gasoil swap spreads have been falling from their recent highs through October, but remain solidly above their long-term average levels, indicating a continued to need to bring volumes in from outside of Europe.

The fact that cracks remain just about above the $30/bbl mark suggests that European refiners will be doing all they can to fill their own regional short, but in the absence of Russian pipeline or waterborne flows, it seems unrealistic to expect current closed arbs to remain.  

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Philip Jones-Lux is Commodity Owner for Sparta. Having worked with organisations such as JBC Energy and RP Global, Philip is a seasoned energy market analyst with expertise across the oil barrel and power markets

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