Weekly middle distillate round up: Diesel cracks cool despite China demand

22 Oct 2021

Quantum Commodity Intelligence - After peaking at year highs last Friday, distillate cracks fell in Europe this week as fears receded about the energy crunch in the northern hemisphere.

There was a growing feeling that low sulfur gasoil futures on the ICE exchange were unsustainable at last Friday’s prices and were driven up by sentiment rather than fundamentals, which likely triggered profit-taking.

By Thursday, cracks for ultra-low diesel barges in ARA were $13.76/b, down $1.73/b from year highs of $15.49/b last Friday. 

Stock levels of diesel and gasoil in the trading hub of ARA also rose 10% this week to ease the pressure.

Inventories were up 199,000 mt over the week to 2.188 million mt, the highest level since August 19, sources said, citing data from Insights Global.

Inventories are still historically low in the trading hub, but the increase in ARA stocks counters concerns of refinery maintenance, tightening stock levels further. 

Part of the last week’s rise in distillate crack values was likely caused by refinery maintenance in the US Gulf, one of the key exporting hubs of distillates to Europe.

According to the Energy Information Administration, utilisation rates in PADD 3 refineries crashed to 82.9% last week, down from 87.5% a week earlier.

Asia

The weaker cracks for diesel in Europe cascaded into Asia, with diesel 10ppm cracks versus Brent falling for five successive sessions in Singapore from $13.89/b to $12.64/b on Friday, although they remain above October’s average so far.

The fall comes despite reports of higher Chinese demand amid an energy shortage and middle distillate stocks in Singapore slipping to a 21-month low, showing how much Europe is leading Asia.

This week China reported its diesel exports bounced back from last month’s record low, rising 44% on the month to 780,000 mt.

But that figure remains the second-lowest monthly figure in more than two years.

At the same time, Indian demand is on the rise, with preliminary data showing India deliveries rose 15% in 1H October versus the same period a month earlier as mobility increased.

The market structure remained unchanged, but the EFS for November fell more than $1/mt to $16/mt.

Jet

Demand for jet fuel in Europe slumped this week as airlines cut back on available seats for sale amid a seasonal downturn.

In western Europe, the third-largest aviation region, airlines cut 525,000 seats for sale to leave capacity at 15.89 million.

Jet fuel cracks dropped alongside distillates through the week.

Levels for cargoes delivered into northwest Europe fell to $12.51/b by Thursday, down from $13.88/b last Friday.

With European cracks falling, Asia followed suit, although to a lesser extent.

Jet cracks fell from $10.82/b last Friday to $10.31/b today, and the spot regrade is now approaching a near one-month high at $2.33/b.

The gradual opening up of Southeast Asian economies, which is having an impact on gasoline, could also be having an impact on jet. The November regrade rose $0.45/b over the month to -$1.60/b and the Q4 regrade at a one-month high.

Kerosene is also used for winter home heating in Northeast Asia. 

China has closed several airports in its inner provinces this week to stamp out the latest outbreak of covid that was tied to elderly tourists.