Distillate margin slide closes Europe diesel arb, drags jet crack to 2-month low

London (Quantum Commodity Intelligence) - Refining margins for diesel and jet in Asia and Europe have slumped, likely reflecting that refiners in the US, Russia and Middle East jumped the gun in anticipation of summer demand that has been hit by further outbreaks of Covid and prolonged lockdown restrictions, sources told Quantum.

While diesel has been derailed by looser fundamentals, jet cracks have fallen in both Europe and Asia to lows last seen in April, tracking diesel downwards as the market maintains the spread to diesel in dollars per metric ton, sources added.

The diesel arbitrage from both the US Gulf and Asia to Europe closed Thursday morning amid an influx of imports into Europe, including two very large crude carriers from Asia, sources said.

"We have had a wave of US Gulf barrels arriving here, and also barrels from the Middle East, and now we have these two very large crude carriers [Neptune M and Seagrace] on the horizon from Asia," said one trader.

Europe is structurally short diesel and is targeted by flows of Russian, US, and increasingly, Middle Eastern barrels.

"Global seaborne diesel flows are continuing their pretty steady upwards pattern observed over the last three quarters," noted Vortexa, the ship tracking company.

"We could even be in for an all-time high above 8mn b/d in June (excluding intra-country flows), and are set to see the second month in a row above the respective 2019 level."

With US refining rates rising, US distillate stocks have gained 700,000 barrels between June 4 and 18, according to the Energy Information Administration. 

July cracks for 10ppm gasoil FOB Singapore have slumped from $6.44/b on June 17 to $5.75/b Thursday, a drop of $0.69/b, highlighting the actual softness of the Asia market amid the crude-driven rally in flat prices.

July cracks for ultra-low sulfur diesel barges in ARA have followed the same pattern, softening from $7.25/b on June 17 to $6.61/b Wednesday, June 23.

Trade for diesel barges in ARA has dried up in June, brokers pointed out, and the expiry of the June Low Sulfur Gasoil futures contract on June 10 had the lowest open interest volume since records began in February 2015, when the 10ppm sulfur future replaced gasoil futures.

Just 250 lots of open interest, or the equivalent of 25,000 mt of ULSD, was left for delivery in ARA.

Meanwhile, spot jet cracks slumped to $2.30/b versus Brent in Asia Thursday, down from $4.11/b on May 20.

Similarly, cracks for jet cargoes delivered in northwest Europe fell to $3.79/b Wednesday, down from $5.37/b on May 20.

"We are still mainly working in a hand to mouth market in jet, with demand usually filled out of storage barrels, rather than fresh cargoes," said one source.

"The May and June regrade [the difference between jet and diesel] looked a little better in April, and we may have seen a little too much yield increase at that time - there has been an increase in supply, which hasn't been helped by Covid in India and elsewhere."

"But the market also sells on a dollar metric ton basis, and it looks as if it's trying to keep the jet and diesel spread stable on a dollar metric ton basis, which softens it on a barrel basis."