Both NWE and the Med continue to show little desire for additional diesel cargoes currently, with inventories remaining well stocked and demand lacklustre.
The discrepancy between achievable cash differentials between vessel classes has become quite sticky in recent weeks, with LR2 availability into Europe remaining high and only set to get higher given the propensity for Europe to be supplied now out of the Middle East rather than closer to home.
This has led to a ~$10/mt differential between sales prices for cif MR vs cif LR2 cargoes in ARA and a ~5/mt difference in Barcelona, and we’re likely to see this become more of a fixture in the market through the rest of the year.
Missing Russian MRs in Europe does not equate to missing Russian barrels from the market in general. As we have elaborated upon in previous posts, Russian barrels into the Middle East and Latin America are depressing the physical markets in the AG/WCI and USGC respectively, in a trend unlikely to dissipate in the short-term.
Looking further ahead, however, with outright prices falling and restricted access to the world’s refinery maintenance teams and equipment, it may become more difficult for Russian refineries to sustain their recent high levels of production through H2-2023.
Whilst this is purely speculative, it is one of a few silver linings emerging for the diesel market in the medium term. Dec-23 diesel cracks in Europe have stabilised since bottoming out at the beginning of the month, and without a significant downside to demand this summer, should have found their floor now.
On European demand, this may have bottomed out in Q1, but there remains little to suggest a return to strength anytime soon.
The macroeconomic picture is certainly not out of the woods yet, despite the latest flash composite PMI figures showing their best readings for almost a year. This is largely services rather than manufacturing-led, however, with European manufacturing PMI’s taking a slight downturn in May, not yet able to track the US manufacturing sector higher despite manufacturing input prices stabilising in the latest data.
In short, the European diesel market will need to look elsewhere for its bullish signals for the time being.
Returning to the more immediate market, Chinese statistics for April have confirmed that whilst production was up, diesel exports were sharply lower, with product imports also up (GACC).
In fact, China imported more refined products in April than it exported. Diesel exports fell especially strongly, down to just 155.000 b/d, the lowest level since last summer as domestic demand spiked on improving economic conditions and power generation demand in the wake of poor hydroelectric performance.
Looking ahead, Chinese exports are likely to recover from April’s low levels but should be more reserved than their early-year highs on the back of weaker export margins for Chinese refiners.
The lack of Chinese diesel barrels in the Singapore market is a little bit of a chicken and egg situation, as it should see cracks appreciating and in turn encourage Chinese exports to pick up once more, but for the time being lower Chinese exports remains a net bullish factor for the Sing market and is helping to narrow the E/W towards single-digit levels for the summer.
Finally, in the US the distillate picture remains a more encouraging one than that found on the other side of the Atlantic.
Demand remains robust, with manufacturing PMI figures some of the strongest in the developed world and product supplied numbers in line with previous years. With jet demand in the US also providing competition for kerosene molecules, the fact that US exports into Europe remain shut and opportunities into LatAm are at least partly blocked by Russian barrels is doing little to dampen US diesel cracks, which look set to end the month in a stronger position than they started it.
The US remains the cheapest non-Russian barrels into ECSAM, even as far down as La Plata which can switch to the AG or WAF as cheapest source on occasion, signalling at least a supportive baseline of arb opportunities to the south for the PADD-3 market, contributing to the overall robust outlook for the US distillate market currently, even if the AG/WCI origins are cheaper into southern ECSAM destinations from August onwards.
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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