The global diesel complex has stabilised somewhat over the last week or two, beginning to reverse slowly some bearish trends and moving off of bottoms realised around the beginning of the month.
Aside a stubborn contango in the August/September spreads, the gasoil swap is now largely back into backwardation with the prompt month moving back above $2/mt.
Whilst a long way off the steep backwardation that characterised the market from Q1-2022 until April this year, the move back into a typical range for this time of year at least staves off suggestions of an impending demand-side collapse.
The uptick in the market has largely been driven by forces outside of Europe, however, and the arbs into Rotterdam, Barcelona, and Offshore Lome have all slammed shut as this band of the eastern Atlantic remains well stocked on ULSD.
For context, even the perennially open arb from EC Canada into ARA has closed on an LR1 in the last few days as the HOGO widens, leaving no significant sources of supply posting open arb econs into Europe currently.
Now, the lack of an open arb on paper does not preclude the possibility of any flows, but looking at the ‘least-worst’ arb out of the Middle East region we see that – at least at the very front – flows are just about pointing to Singapore for now.
This is a delicate balance which is shifting depending on intra-day movements in the E/W spread, but the trend in the physical markets has seen sales prices improving recently in Singapore vs a stagnant picture in Europe.
A trend which, if continued, will see this incentive to move barrels east only increasing in the short run, especially if the E/W’s recent narrowing run can continue from a current -$12/mt down into single digits (a level achieved in this period in four of the last five years).
Europe is also pricing itself out of receiving USGC barrels, with a widening HOGO a symptom of both European weakness and fundamental tightness remaining in the US system.
With gasoline demand apparently robust and refining incentives to produce gasoline at levels which should see US refiners doing what they do best (producing max gasoline), US diesel inventories may find it difficult to climb back towards 5-year average levels through the summer months.
The need to curb exports out of PADD-3 (the discount vs Chicago is at a 5-month high), and occasionally draw in additional supplies into PADD-1 should keep the HOGO wide for the time being, with the trend of the last week or two likely to continue out towards the 20cpg range.
Attention in the Asian market has been focused on the latest batch of Chinese export quotas over the last week or so, but a quick analysis shows that Chinese diesel exports are unlikely to see any kind of restriction from export quotas in the short-run at least.
With at least 12 million tonnes of clean product export quota left entering May, this compares to 9 million tonnes that were available as of May last year.
Instead, news of spot gasoil purchases from South Korea to cover specific shorts in northern China, record high demand in India, and falling inventory levels in Singapore are the kind of bullish indicators which are justifying the narrowing E/W in our eyes.
With spreads widening slightly, physical cash premiums have also been ticking higher again on barrels loading out of the AG and WCI, and this side of the market should be able to maintain some semblance of strength in it for the time being. Pressure on cracks is coming for the EoS distillate market later in the year, but for now we are likely to see a stabilisation towards the top end of the range.
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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