Distillate summary: Diesel shoots higher on French strikes, jets slips below

Quantum Commodity Intelligence - Global diesel markets rocketed higher this week with cracks for cargoes into Europe rallying $14/b versus Brent as French unions blocked four refineries, while jet slid below diesel as travel demand slowed.

The European diesel market tightened this week as two-thirds of French refining capacity remains impacted by ongoing strikes due to a wage dispute between unions and TotalEnergies and ExxonMobil.

Some 15% of French forecourts are short of at least one type of road fuel, most often  diesel, French government spokesperson Olivier Véran told French TV on Friday.

In the north of France, the tightness is worsening with one out of three pumps running dry, as the country's two largest refineries in Gonfreville and Gravenchon, near the port Le Havre, are both shut due to strikes.

TotalEnergies and ExxonMobil have not gone into wage negotiations since the strikes started nearly two weeks ago, French press reported, with the two majors aiming to prevent a fuel shortage by bidding up diesel cargoes into Europe.

Firm demand propelled 10ppm diesel CIF NWE spot cargoes to $1,263.25/mt by the Friday close, up $263.50 on the week.

Cracks reached $72.47/b, up $24.87/b on the week, with both outright prices and cracks at three-month highs.

The backwardation between the front two months in the underlying ICE low sulfur gasoil futures hit $100/mt this week, its sharpest since distillates spiked in early March following Russia's invasion of Ukraine.

The strikes come at an awkward time for Europe as it tries to wean itself of Russian distillate imports by early next year, while a further 1.6 million bpd of capacity is impacted by scheduled autumn maintenance.

At the same time, US distillate inventories tumbled to a near three-month low of 111 million barrels, due to a slowdown in refining and exports jumping to 1.656 million bpd – its third highest since the start of the pandemic, EIA data showed.

Stocks on the East Coast took the biggest hit, shooting up the NY Harbor futures by 23% on the week, and worsening the US arb into Europe.

The November HO-GO spread – the difference between NY Harbor ULSD and European LSGO futures – hit a one-month high of $0.224/gal ($70/mt), making it more attractive for refineries in the US Gulf to export to the East Coast, rather than Europe.

That has forced Europe to look even more East for its additional diesel supplies, with 10ppm diesel cargoes rising nearly $27/b on the week to $147.08/b FOB Singapore, boosting the crack to a six-week high $52.5/b.

BP has been bidding up 10ppm gasoil cargoes in Singapore, pushing the cash premium over swaps to $6.16/b, compared to $2.02/b a week earlier, Quantum data showed.

October 10ppm swaps are now nearly $100/mt below the same ICE LSGO contract, its widest since late March which should shift more barrels west.

Jet tumbled below diesel

This week's strength in global diesel markets, coupled with a sharp tail-off in forward travel booking demand after the summer rush, has seen European jet fuel cargoes slide further below diesel cargoes this week.

Jet fuel cargoes CIF NWE were last assessed at a $72/mt discount to October LSGO after slipping below the contract at -$7/mt last Friday, the first time since the start of the pandemic.

Yet despite the rise in the discount, cracks for jet fuel cargoes ended the week nearly $18/b higher at $53.29/b due to strength in the underlying gasoil contract.

While global air passenger bookings continue "to paint a positive picture" for the airline sector, European forward bookings "are looking weaker for the winter," the International Air Transport Association (IATA) said this week.

Rising inflation and energy costs, coupled with a weakening euro and pound to the dollar is curbing travel demand more sharply at the start of autumn, with IATA now expecting travel not to hit Eurocontrol's base case forecast.

While Latin American travel markets continue to grow, weakness in Europe, coupled with further flight cuts in China took this week's capacity down to levels last seen in May, OAG said this week.

Jet fuel FOB Singapore was last assessed at a three-week high of $129.91/b, with the crack rising nearly $12/b on the week to $35.66/b.

The November East-West arb widened to a 1.5-month high of $73.85/mt, which should shift more barrels to Europe.