Distillate summary: Diesel sink as US, Asian arbs point to Europe

Quantum Commodity Intelligence – Distillate margins continued to slide from five-month  highs this week as seasonal demand waned and the expectation of increased arrivals hit refining margins.

March LSGO futures versus frontline Brent crude futures retreated $2.50/b over the week to hit a one-month low while cash differentials for large cargoes delivered into the Med and Northwest Europe also slid.

The fall in cracks comes as backwardation remained largely stable, indicating it is more of a structural correction rather than a short term issue.

On the fundamentals side, the return of Russian supply helped pressure prices in the Mediterranean, which are now trading back firmly below those in northwest Europe.

Any concern regarding supply from NWE also waned, with Mongstad refinery restarting after a fire on Thursday.

While in the Middle East the imminent return of the Ras Tanura refinery in Saudi Arabia was set to increase supplies from east of Suez

In the US, BP's Whiting refinery will start to ramp up in March as well as Marathon's in LA, which was knocked out by weather.

That news largely offset a bigger than expected draw in stocks in the US, which fell 4 million barrels in the week to February 17.

That's the lowest since December last year on the back of a rise in deliveries and leaves stocks back in line with where they were a year earlier.

With the additional supply coming back online, analysts at Sparta Commodities say the arb from the US Gulf to Europe is now either open or close to open as the HOGO for March has sunk to the lowest level in nearly a year.

At the same time, sinking prices in Asia has left Europe as the favoured destination for supply as far east as the west coast of India.

On European inventories, ARA stocks were little changed and remain around 25% down on the year. 

"There are clear signs of increased marginal supply from Asia and the US into Europe and European demand remains lacklustre, albeit showing some signs of improvement," said Sparta, adding that those spreads may be nearing the bottom of their bear run as Europe enters maintenance season.

In Fujairah, distillate stocks fell 29% over the course of the week, down 820,000 barrels to a six-week low of 2.1 million barrels.

Asia

Singapore FOB prices tracked the fall in LSGO almost dollar for dollar over the week, with the EFS seeing marginal volatility but staying around the -$55-60/mt level. 

Increased Chinese supply this month and next was said to be behind the driver, as stocks in China were said to have risen 3% over the course of the week. 

The selloff also came as knocked-out refining capacity across the region starts to come back online following a heavy maintenance slate at the start of the year, with regional players in the market offloading several March parcels via tender this week.

South Korean refiner GS Caltex offloaded 300,000 barrels of March 10ppm at a $1.20/b discount to the Singapore paper price and was offering another 300,000 barrels each of 50ppm and 500ppm via tender.

Crude imports into India hit the highest level in 18 months in Jan, indicating a ramp up in exports that will likely head west and not east, analysts say.

Stocks in Singapore were down 7% to 8.8 million barrels, while in Japan they were flat.

Jet

With the fall in diesel prices, the regrade was up in the west and dropped in the east.

Physical cargoes of jet into northwest Europe were pegged at a $43/mt premium over front month LSGO, up $4/mt in a week.

But in Singapore the physical regrade retreated around $0.60/b and for front-month swaps they were down $0.80/b.

The reason for the decline is rising exports from China as well as a seasonal fall in demand in Japan, the two largest economies in Asia.

"The market might have not fully priced in higher jet/kero exports from China due to overly bullish expectations of Chinese air travel demand amid strong recovery during the Lunar New Year holiday, analysts FGE said in an update to clients.

Despite a weaker regrade in Singapore, there will be no relief from Europe, where European cracks are at their lowest since December amid a seasonal lull.