As has become typical since the Russian sanctions, the Red Sea continues to serve as the most cost-effective supply source for NWE and the MED regions, if we discount the limited competition from EC Canada ULSD barrels.
Despite MR freight rates from USGC to Europe having fallen to their lowest level in 3 weeks, coupled with decreasing USGC 10 diffs, the TA arb is yet to open.
In the European market, the ICE GO Swap Spread has experienced an uptick, rising from +3 to +5 over the past week. With European GO cracks having experienced a similar ascent over the last week.
Despite this clear sign of European distillate strength, with the E/W ULSD having narrowed from –14 to –11 USD/MT over the past week, AG and WCI arbs currently point towards Singapore/EoS.
Here perhaps we are seeing the effect of the increasing ARA ULSD stocks, on the back of restricted Rhine barge flow caused by the currently low Rhine water levels.
Furthermore, the uncertainty surrounding WCI ULSD loadings, following the force majeure issued by Reliance due to Cyclone Biparjoy, has contributed to the boost in the EoS market.
However, it’s worth noting that the production of Sikka ULSD has not been affected. Although some congestion is expected when the port reopens, it is anticipated to be a temporary disruption lasting approximately 3-4 days, according to our in-house pricing analyst Thomas Cho.
With the restricted flow of Rhine barges and the temporary impact on ULSD loadings in WCI expected to be short-term situations, Far East refineries set to resume operations after their maintenance period by early July and Singapore’s MD stocks reaching a two-month high this week, the positive trend in European ULSD spreads and cracks should persist in the short to medium term.
Consequently, the E/W ULSD differentials should also be expected to widen, attracting AG/WCI arbs to Europe.
Despite facing competition from grey Russian barrels, the USGC remains the most cost-effective source of ULSD barrels for Northern Brazil.
The situation is more varied in Southern Brazil, where record-low freight rates have contributed significantly to WCI currently being the most cost effective, with competition from the AG. The recent Cyclone Biparjoy adds uncertainty to the availability of these WCI ULSD barrels, however.
AG ULSD barrels currently dominate the Argentinean market, also benefiting from low freight levels.
In WCSAM (Chile), the Far East refineries continue to hold their cost-effective position, with their upcoming maintenance period expected to reinforce this trend by the end of June.
The ULSD TA arb remains closed, with RVO levels are at their lowest in over a year being a significant factor.
These above-mentioned factors present a negative picture for US distillates. However, HO spreads have moved into backwardation over the last week, on the back of US diesel stocks currently being below their 5-year range.
This indicates that previous yield switching strategies, due to the relatively negative position of US HO Cracks in the first half of 2023, have reduced the need for large ULSD outlets.
Following the positive trend in global distillates, the US distillate complex is likely to follow suit in the short term. Concerns arise regarding US ULSD stock levels heading into Q4 2023, with the potential for significant ULSD arb moves into New York and the USWC.
Monitoring US distillate levels will be crucial in the coming months.
As noted previously in the piece, ULSD arbs from the AG and WCI currently point towards the Singapore region, driven by the narrow position of the E/W ULSD.
On top of this, AG/WCI also offer the most cost-effective ULSD arbs into Singapore, displacing the usual South Korean refineries that are approaching the end of their maintenance period. The situation is further exacerbated by Singapore’s MD stocks reaching their highest levels in two months, putting pressure on the local distillate complex.
However, there are some alleviating factors. The Geelong refinery in Australia, facing a broken compressor, is not expected to produce any diesel until September 2023, providing relief to the market.
Additionally, the Front Tyne VLCC is set to load ULSD in Singapore and transport it around the Cape to Europe, according to our in-house Pricing Analyst Thomas Cho.
Sing Regrade moving from -1.45 to -1.65 USD/bbl over the past week, suggests that a significant portion of the Singapore MD stock increase is in the form of jet fuel.
Despite these mixed factors, the Singapore distillate complex has demonstrated strength, with positive movements in both cracks and spreads over the past week.
However, the return of regional refineries, AG/WCI ULSD arbs pointing at Singapore, and the elevated stock position create a relatively negative outlook. As a result, a widening of the E/W ULSD market can be expected in the short to medium term.
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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