Distillate summary: Cracks rise and jet fuel arb widens

24 Jun 2022

Quantum Commodity Intelligence – European diesel prices fell about 3% on the week as a declining crude complex pulled down values, although fears of demand destruction in the crude market did not permeate into distillates with the relative price, or crack spread, rising.

July gasoil futures were marked at $1,292/mt by the 1630 Singapore cash market close on Friday, down $43/mt on the same time a week earlier.

Cheaper crude was responsible for the fall, with $10/b being wiped off the value of the international futures benchmark Brent (Asia closing times), but as diesel fell by less, the crack spread rose about $4/b on the week to more than $65/b.

Aside from expiry volatility, this week saw record premiums for ULSD in Europe, coming despite the fact global stocks of distillates rose over the week.

Stocks of distillates in the three main hubs of Singapore, Fujairah and ARA rose almost 3 million barrels last week, according to government and private data collected by Quantum, the biggest weekly rise in months.

While data on US stocks was delayed due to the EIA experiencing technical issues, the market is not being driven by immediate fundamentals, but perpetual fears of a shortage of supply going forward as Europe tries to wean itself off Russian diesel.

In Asia, cracks surged above $71/b, a record high, on the expectation of sustained low exports from China and a flatlining of exports from India.

Following Europe, flat prices fell by about $5.50/b ($41/mt), with physical cargoes assessed at just under $181/b FOB Singapore on Friday, far less than the near $10/b fall on crude.

On the fundamental side, China released data this week showing diesel exports fell 90% on the year and 80% on the month to under 30,000 bpd.

While that has been driven by falling crude throughput, few expect rising refinery run rates on the back of the first year-on-year increase in mobility in China to result in higher exports.

Restrictive export quotas will keep a lid on those flows, much to the chagrin of refiners who are purchasing more Russian crude than Saudi now at very steep discounts.

Looking down the curve the arb barometer the EFS – Singapore July swaps minus July LSGO futures – is close to zero, meaning little supply of diesel going forward will come from Asia.

Europe will rely more heavily on US supplies, which may increase following this week’s announcements by the treasury that it expects diesel demand to fall by 5-15% over the next year due to record prices there.

Jet

Jet prices, like diesel, fell on the week on softer crude, although like diesel, they outperformed crude.

By 1630 Singapore time, July CIF NWE swaps were pegged at $1,387/b, down around 4%, or $63/mt ($8/b), on the week, a figure that was less than crude and saw front month crack spreads rise more than $2/b to a record high of just under $70/b.

Despite a raft of cancellations of flights over the summer, analysts OAG expect global capacity to reach 100 million seats next week, much of that demand coming in Europe.

The picture was similar in Asia with front month July swaps falling $9/b on the week and pushing the paper crack up more than $1/b on the week.

The difference in price widened the spread between the two regions by $6/mt on the week to $115/mt, increasing arbitrage opportunities with sources saying up to 1 million mt could arrive in Europe in July.

Of note, is the relative weakness of jet fuel versus diesel, with the regrade for July trading at $13/b below diesel, a dynamic that means jet and not diesel will be the distillate much more likely to arb from east to west over the next few months, as diesel stays in the local market.