The Red Sea arbitrage remains the most cost-effective into Europe, a trend persisting for the last several weeks. Joining this trend, WCI and AG arbs have now opened into Europe due to consistently high European sales prices and falling ME FOB prices triggered by reduced demand during India’s monsoon season, which should see exports rising.
Additionally, the seasonally wide East-to-West (E/W) spread reinforces AG and WCI arbs directing cargoes to Europe for the next three months of arrivals.
The second half of August and September are expected to witness a substantial influx of East of Suez (EoS) arrivals into Europe, a trend already evident according to our Mediterranean sources. MR MED CIF sales prices have reduced from +$12 to +$6.5 versus Platts CIF MED over the last week.
While ARA (Amsterdam-Rotterdam-Antwerp) stocks continue to draw, both of the front two ICE GO Swap spreads and September GO cracks have decreased over the past week, although all remain at seasonally high levels. The current low stock scenario necessitates sustained elevated spreads and cracks to encourage diesel production, although to consider them a buy at these heightened levels is challenging.
The E/W spread will likely remain seasonally wide to facilitate EoS resupply for Q4 as Europe prepares for its first winter without Russian gasoil. However, around halfway through to the end of Q4, this will likely reverse as the Singapore region grapples with its own resupply issues, a topic to be further explored later in the piece. A key question for consideration is how many AG barrels can meet European winter specifications into Q4?
The US Gulf Coast (USGC) finds its position being contested even in Northern Brazil by AG and WCI origin barrels, as USGC MR freights to Brazil rose in the past week, offsetting the decrease in USGC differentials from -6.25 to -6.75cpg over the same period.
Reduced flow from Russia due to ongoing turnarounds will provide more space for USGC, and AG/WCI, exports into Brazil. Increased Brazilian demand combined with low stocks has led to Petrobras’ announcement of possible diesel shortages and a projected 26% retail diesel price hike.
The potential for an increased flow from AG/WCI to Latam due to falling FOB prices in AG and WCI should be partially offset by an increased pull from East Africa currently.
Ongoing delays in the Panama Canal are affecting West Coast South America (WCSAM) pull from the USGC. Far Eastern refineries are currently landing as the most cost-effective source into WCSAM.
As Brazil’s demand intensifies, combined with dwindling US stocks, HO cracks and spreads are poised to maintain their elevated status. However, akin to Europe, caution is warranted before buying at these levels. Similarly, the US isn’t currently reliant on the Transatlantic (TA) arb. Thus, the HOGO spread is anticipated to remain widened into Q4 2023.
Singapore and East Asia
WCI and AG barrels have maintained their position as the most cost-effective into Singapore, although they are facing some competition from South Korean LRs; a somewhat small flow. This trend reflects the ongoing impact of decreasing FOB prices in the Middle East (ME), despite the region also currently experiencing substantial demand from Latam, Europe, and Singapore. LR1 fixtures from the ME such as the Jag Amisha and Cielo Rosso have been noted heading to Singapore. However, these moves stem more from low stocks rather than improved ME to Singapore economics.
Singapore’s middle distillate stocks remain near eight-month lows, influenced in part by currently reduced Chinese gasoil exports. Consequently, the Aug/Sept SG 10 spreads have surged from $2.0 to $2.4 per barrel over the past week. However, in a somewhat surprising development given the low stocks, and similarly to Europe and the US, September SG 10 cracks have dipped from +$32.25 to +$30.25 per barrel over the past week, to maintain the seasonally wide E/W spread.
Market participants anticipate Europe’s high sales prices to persist due to seasonally low stocks and the upcoming winter without Russian gasoil. Thus, the E/W spread is expected to remain wide until this issue is addressed. This should change towards the end of Q4, especially if Europe partially resolves its supply concerns, further influenced by the timing of new Chinese export quotas.
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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