Competition is currently underway between South Korea and West Coast India (WCI) barrels to claim the title of the best arbitrage (arb) source into Singapore.
Both have been engaged in a downward pricing trend since late September, a decline partly influenced by the return of WCI and Middle Eastern refineries from their recent maintenance.
The interesting development is that whilst November and December WCI shipments still predominantly point toward Europe, January and February 2024 loadings have started to marginally favour Singapore/East.
This shift can be attributed to the narrowing of the January East-West ULSD (E/W) spread since late September from -$35 to -$17.50 /bbl currently and the weakening of Rotterdam sales prices as we move down the curve.
This narrowing of the E/W spread is partially an outcome of the absence of additional Chinese refined product quotas for 2023.
There is also the suggestion that European strength, particularly at the front of the curve, is due to winter diesel constraints and short-term issues in German refinery supply.
Singapore diesel spreads have weakened over October and the beginning of November from +$4 to +$0.75 /bbl which is attributed to the widening moves of the E/W at the very front of the market, with cracks following.
The E/W spread, past the very front, is expected to continue to narrow in the medium term
,with indicators such as European cargo pricing and stock levels suggesting Europe is sufficiently supplied (outside of ARA).
However, it’s worth noting the lingering issue of low stocks in the United States, apart from PADD 3, which could affect the situation as well as high runs in China and low gasoil exports that most probably have led to stock builds there.
Red Sea arbs are currently the most cost-effective and remain open into Europe, especially Rotterdam, along the curve. Moreover, AG, WCI, and USGC arbs have also opened into Europe, notably for deliveries on or before December’s ICE GO expiry.
The decreasing FOB premia in AG and WCI, attributed to these regions returning from maintenance, have contributed to this scenario. Additionally, recent PMI data indicates economic struggles in both China and India.
In the case of the USGC, the arb has opened, signalling Europe’s continuing need for winter diesel specifications. The ongoing weakness of the USGC 10 diff and USGC MR freights has played a role in this development.
European cracks have experienced a general decline since early October, with December dropping from +$31 to +$29 per barrel.
This trend is expected to persist after the winter diesel concerns subside, as Europe’s gasoil stocks have returned to 2021 levels in terms of days of demand cover.
In a contrast to Singapore and European trends, HO cracks and spreads in the United States have been on the rise since the start of October.
December HO cracks have surged from +$35.50 to +$39.50 per barrel over the course of October.
This can be attributed to the ongoing low stock situation in the US, particularly in terms of gasoil
, as the nation prepares for the winter season.
The US finds itself in a somewhat contrasting position with low stocks overall, especially in PADD 1, with the potential for NYMEX HO spreads to rapidly rise as winter approaches, and this could lead to more arbs opening up into New York in the near future.
In contrast, the USGC, the primary exporting region, maintains relatively balanced gasoil stocks, which is reflected in the wide position of the USGC 10 diff.
The USGC remains the most cost-effective arb into Northern Brazil, but it faces competition from Asian origin barrels in the rest of Latin America due to the prevailing weakness in the Asian FOB Premia.
The return of Russian gasoil exports is expected to challenge USGC barrels into Brazil, potentially redirecting more supply into Europe.
Despite these complex dynamics, the low stocks situation as winter approaches in the US suggests that HO cracks and spreads are likely to remain high to encourage high refinery runs and external resupply.
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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