Distillate summary: China, India spook diesel markets
Quantum Commodity Intelligence – European diesel cargo prices dipped this week but staged a late recovery on Friday to end the week about where they started, as news that Chinese exports could grind lower saw LSGO futures rally on Thursday to wipe out earlier losses.
Cargoes delivered into Europe were pegged at $1,007.50/mt CIF on Thursday, around $5/mt up on the week and at a $11.25/mt premium to LSGO futures.
Relative to crude, diesel was back where it was last week with spot cargoes valued at $41.20/b over Brent.
The market was trending down for most of the week as traders weighed up how long a Russian ban on exports would last, but reports that China would not issue a third set of export quotas to refiners as well as statements about a prolonged choking of supply from Russia sent prices spiking on Thursday.
LSGO futures for September were valued at $996.25/mt by Thursday at 1630 London time, up $23/mt on a day when crude declined by about $1/b.
The strength of Europe pushed the EFS down back below -$55/mt, enticing Middle Eastern barrels to flow west and the time spread rose from $32.25/mt to $37/mt.
The rally could have been worse had it not been for a surprise fall in US stocks, with the EIA showing distillate inventories rose 400,000 barrels versus refiners, which had said they had fallen by 1.3 million barrels.
And in ARA, middle distillate stocks rose at the fastest rate since May, climbing 4% to just shy of 2 million mt. They are now 10% above this time last year but 12% below the five-year average.
With Rhine levels sinking, flow into and out of ARA will be choked, which could lead to higher stocks and delayed demand.
Asia
Physical diesel cargoes in Asia assessed by Quantum moved in the same direction as Europe, but not by as much.
Cash differentials were assessed at $2.80/b over underlying swaps, up only marginally on the week and spot cracks over Brent were back up over $35/b.
The EFS at -$55/mt may start to rise given the increase in expected Indian demand following the end of the monsoon season.
That rise in Indian demand will offset any refiners returning from maintenance season in November and narrow sharply Asia's diesel surplus from 270,000 bpd from November onwards, according to FGE.
Inventory-wise, Singapore distillate stocks were back up, rising 370,000 barrels to leave inventories at 9.374 million barrels and in Fujairah stocks were up 13% to a six-week high of 2.215 million barrels.
In brief, the news that China may not issue a third batch of export quotas will likely tighten Asia balances, which will likely support European values.
Jet
The rise in European diesel values crunched the regrade over the week, with European cargoes assessed at $53/mt over LSGO, down from around $60/mt a week earlier.
Market structure still increased, with M1/M2 at $34.25/mt flat on the week, but recovered on higher diesel prices on Thursday.
The east-west fell as a result on Thursday with European values exceeding those in Asia and the October east-west was pegged at -$70/mt.
The arb has been open for some time to Europe, largely due to the weakness of jet in Asia.
That was evident again this week as October jet swaps versus 10ppm fell to -$3.70/b – the lowest it has been in six months.
The weakness is still in international flights, particularly in China, but that may change over the next few days as China's Mid Autumn festival starts.
That plus seasonal demand for kerosene as a heating fuel in northeast Asia will provide support and likely close that arb to Europe.
"We believe the market has not sufficiently priced in these factors and are thus more bullish than the forward market for the Singapore regrade," said FGE in a note.