Asia distillate cash differentials turn positive, cracks hit one month high

Quantum Commodity Intelligence – Cash differentials for spot cargoes of both diesel and jet fuel turned positive on Wednesday amid strong bidding interest in the Platts trading window - a dynamic that comes on the back of a sharp weekly rise in airline seats being offered in Asia.

No deals were heard, but bids were seen at flat to underlying swaps, indicating positive cash differentials for both 10ppm diesel and jet fuel for the first time in months.

Distillate cracks have been declining since mid-May, hit at the same time by both an oversupply of diesel and jet and a reduction in demand triggered by regional lockdowns in the continent's biggest economies.

However, paper cracks for diesel have been stabilising so far this month with paper jet cracks for August rising marginally since 1 July.

As such, the August regrade has narrowed marginally to -$2.25/b from -$2.40 at the start of the month, while the spot regrade stands at -$2.29 versus -$2.80, with most of that increase coming from higher jet cracks.

With arbitrage economics in the form of the east-west jet spread largely unchanged over the past few days, it appears the rise in spot jet cracks is down to regional factors, and data from aviation analysts support that view.

The number of airline seats on offer globally broke 80 million a week for the first time last week, although that remains 30% down on the 119 million that was being offered in the same week in July 2019, according to industry analysts OAG.

However, much of last week's growth has come from the Asia region, the analysts said, where seats on offer in Southeast Asia rose 21.6% on the week, from 2.35 million seats in the week ending 12 July to 2.87 million seats in the week ending 19 July – a rise of 500,000 seats.

And seat numbers on offer in South Asia and Northeast Asia also rose, with the former increasing 3.8%, or 830,000 seats, and the latter rising 7.9%, equivalent to 229,000 more seats.

That also comes on top of the fact that distillate stocks in Singapore remain 17% below the average so far this year.

Market Watchers Wary

Analysts, however, are wary that these are early signs of a sustained recovery.

Infections remain at close to their peak in many southeast Asian nations, while ship tracking company Vortexa warned that global diesel seaborne flows have been rising for months and could reach a record in July of more than 8 million bpd, due to surplus supply.

Vortexa said that despite fewer Russian diesel exports to Europe, lower refinery runs there and increased exports to West Africa, Atlantic basin margins continue to struggle and that is bearish globally for diesel cracks.

"High seaborne diesel exports will continue to put downward pressure on global diesel cracks and also refining margins, likely holding some players in Europe and other places back from restarting units or maximising runs," it said.

"At the same time, rising seaborne imports of crude to Europe suggest higher refinery runs, while the recent surge in PADD 3 diesel exports to Latin America is reflective of increased runs and comparatively weak pricing in the Gulf Coast."

"The sustainability of these trends is questionable. The bigger picture is that until demand comes back in Southeast Asia and more consistently across the globe, the diesel outlook remains poor."