The progression of timespreads vs arb spreads in the last few weeks is pointing to a diesel market in Europe that is somewhat caught in two minds.
With uncertainty just around the corner, the emphasis appears to remain on acquiring sufficient buffer inventories to cover potential shocks through the rest of the quarter – albeit doing so from within the available ARA market, rather than pulling in additional material from outside of the region.
We can realistically see timespreads moving higher still so long as players in ARA are reluctant to release their stocks, but one potentially unintentional consequence of this continues to be a narrowing of arb windows into NWE from outside of Europe.
With only barrels out of the Red Sea viable into Rotterdam for the foreseeable future, the net short in NWE cannot be viably maintained in the longer term.
With market structure unlikely to weaken in a scenario where extra-European volumes begin to dry up, it will be the E/W spread in particular which we see needing to widen through Q2 in particular.
With the prompt E/W trading around the -$50/mt mark but April marker closer to -$30/bbl, we see some strong potential for this to widen as the European market realises its short as we move into Q2.
The complication on this theory, however, comes in the form of a resurgent Asian market, where timespreads and cash diffs are once more strengthening – despite a relatively consistent flow of Chinese exports through the end of 2022 and recent weeks.
It is therefore more difficult to deduce the rationale behind strengthening timespreads in Singapore currently, with refining margins in the region still robust and economics from key swing-supplier India into Europe not looking overly attractive.
As such it will be prudent to keep a close eye on potential explanations for the strength in Singapore (refinery maintenance or unexpectedly strong demand) – as the absence or fading of these supportive factors could see this side of the E/W equation being the first to move in order to reopen those flows into Europe going forward.
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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