South Korea and West Coast India (WCI) continue to be in a tight race for the most cost-effective arb into Singapore. WCI has gained an edge for January and February 2024 arrivals, evident in multiple observed fixtures including LR1 Swarna Kaveri.
From February 2024 onwards WCI diesel loaders project East due to relatively narrow 2024 East-West spreads.
South Korean FOB premia have declined since the end of September, moving from +$1.4 to -$0.7 /bbl versus MOPS 10ppm currently, signalling a shift towards jet exports rather than blending into the gasoil pool.
The equivalent Jet FOB premia have surged to their highest level since February 2023, driven by increased demand from Japan and the USWC.
The narrowing SG Regrade trend seems persistent, with all Asian jet arbs to Europe recently closing except from the Red Sea.
This trend aligns with the return of pre-COVID levels of Asian passenger numbers. Dec through Feb demand in OECD is seasonally high for jet/kero.
However, despite this bullish trend, the prediction of a much warmer Japanese winter due to El Niño and Japanese jet stocks nearing their upper range in the past five years suggests a possible ceiling to this surge.
Singapore diesel cracks have shown a slight rebound this week, with November’s moving from +$22.25 to +$25 /bbl, but are anticipated to continue their overall descent that has been evident since early September.
The Asian gasoil system appears weakened for demand, accompanied by a high of over 2 years in Singapore middle distillate stocks, suggesting a downward trajectory for diesel cracks in the coming weeks.
That is despite a weak month for Chinese diesel exports in recently- released October customs data.
This week, ICE GO cracks and spreads have exhibited some strength, notably December’s crack escalating from +$26.25 to +$28.95 /bbl.
This uptick stems largely from continuing diesel shortages in pockets of South and Eastern Europe due to ongoing refinery problems.
ARA gasoil stocks have surged to levels akin to October 2022, intensified by the lack of German winter diesel specifications and delays with Rhine barges getting upstream due to high water levels.
Various arbs into Europe have nevertheless opened at the front, including AG, WCI, and USGC diesel, alongside the notably cost-effective Red Sea arbs, notably those that are best placed to produce/provide German diesel specifications.
If NWE inflows push higher as a result, Europe’s persisting demand issues, compounded by a possible warm El Nino winter, spell a correction in cracks ahead, particularly with post-refinery-maintenance.
Europe’s relatively ample gasoil stocks are unlikely to sustain these arbs in the medium term.
Another issue is the ample supply in the USGC, where the USGC 10 diff continues to widen.
The December diff has now moved even further past its historically widest point.
With the colonial pipeline still at full capacity, PADD 3 is incentivised to export. This has opened the USGC TA arb at the very front, as discussed above, for example.
However, it is the effect of PADD 3 wanting to export almost all products currently that is contributing to USGC MR freight surging, Houston to Argentina MR freights this week having increased to $102 /mt, its highest level since December 2022.
As such and combined with renewed Russian gasoil exports and weakness in Asian gasoil premia in general, has resulted in the USGC only being the most cost-effective arb into Northern Brazil currently.
We should therefore expect a continued widening of the USGC diff in the short to medium term so that barrels can price further afield, and conversely the HO complex to price up to attract external resupply into 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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