Distillate summary: European and Asian cracks stabilise for 2nd week

Quantum Commodity Intelligence – Distillates cracks in Europe were broadly stable on the week after jumping $2/b the week before, indicating the ructions caused by a re-routing of Russian diesel were starting to have less of a price impact on the market.

Backwardation remains razor thin at just over $1/mt, indicating that the market is well supplied with diesel with the curve reverting to a more normal structure for this time of year.

LSGO cracks were pegged at $15/b versus front month Brent futures, slightly up on the week, but a long way short of the near $30/b seen six weeks ago.

On the fundamentals, global stocks drew down for the first time in five weeks, with the US chalking up a 4.2-million barrel distillate fall to leave stocks near a seven-month low.

Most of that draw was in the US Gulf as shipments to Latin America rose, sources said, while Japan stocks hit a three month high.

Elsewhere, in Europe, stocks also rose, reflecting what is still thought to be a relatively high level of inventories at ARA facilities.

On Friday the UK published its Q1 data for trade, showing that diesel imports during March had fallen to the lowest level in nine years.

With Q1 imports flat to five-year averages, it highlights how the price slump at the end of Q1 impacted buying habits as buyers chose to run stocks down.

Cargo premiums in the North were broadly steady over the week at $12/mt, while in the Med they rose $7/mt on the week to about $10/mt, according to Quantum data, with reports that Greek refiners experienced unplanned maintenance, pushing up premiums to near parity with the north.

There was talk of a slowdown in volume coming from the Middle East and Asia with the EFS averaging -$20/mt for April and rising to -$13/mt since then.

Refinitiv said exports week-on-week were down 30% from the Middle East.

Asia

While cracks stabilised in Europe last week, in Asia they rose $0.50/b or so with physical cargoes pegged at $13.50/b over front-line Brent.

The major news in Asia was talk of a Chinese export cut year-on-year in its second batch of quotas.

Refiners were given a quota of 9 million mt for diesel, gasoil, gasoline and jet, down from 19 million mt in the first batch issued in January.

It still remains double the level that was issued in the second batch last year.

The rationale for lower quotas was that domestic margins remain high amid weaker Asian levels, but a 17% fall in crude imports month on month for April in China dented that notion.

The figures, at 10.32 million bpd, leave imports down 1% on the year at a time when Chinese manufacturers became increasingly more bearish.

Analysts, however, expect any fall off in Chinese supply to be met by a seasonal demand lull for diesel in the late summer months due to the monsoon, an increase in Indian demand as well as refiners returning from maintenance.

"Export-oriented refiners in South Korea, Singapore, Thailand, and Japan will likely cut runs at the margin and reduce gasoil production in the next 1-2 months. Coupled with peak spring refinery maintenance, this will prevent oversupply in the region and provide a floor for Asian gasoil cracks," FGE said in a note to clients.

Asian cracks will have to fall markedly for an arb to be open prior to August.

Jet

The European jet regrade fell this week amid expectations of higher flows from the Middle East, with physical CIF assessment falling from $52/mt over frontline LSGO to $48/mt.

The forward curve became a little tighter with May/June narrowing from $2/mt to $1/mt, although well within the margin of error to be called stable.

Global airline capacity eased, according to OAG while jet outflows from the Middle East rose by 25% to almost 500,000 mt, according to Refinitiv.

In Asia, the market looks marginally stronger than diesel with cash differentials for jet fuel over swaps pegged at $0.40/b versus diesel at a discount of $0.45/b.

Taking swaps into account the cash regrade was at $0.32/b versus $0.38/b a week earlier.

That regrade shrinls over time, with the regrade for jet kero over 10ppm for front month swaps pegged at -$0.60/b.

While that is down on the week, it remains up around $3/b on the month as jet demand improves.