Distillate summary: Russia revokes ban, market waits for Chinese exports

Quantum Commodity Intelligence – There was one main talking point in distillate markets this week, and that was how long a ban on diesel exports would last and how far prices would fall when confirmation came.

Refining margins for distillates were steadily decreasing throughout the week, but they plummeted $3.5/b on Thursday as market participants got wind that a statement was due imminently that the ban would end.

Confirmation came through on Friday, when Russian authorities pushed out lines stating that pipeline exports (which account for about 75% of exports) would resume with immediate effect providing sellers pledged to provide an equal amount of distillates to inland customers to calm harvest-fuelled energy inflation.

The news of higher supply, alongside warm weather in Europe and fears of a sputtering US economy left LSGO futures trading on ICE at about $880/mt on Friday, down 12%, or about $120/mt on the week.

In terms of refining margins, front month LSGO versus frontline crude was pegged at about $34/b, down almost $8/b on the week – figures that would stun traders in a pre-war environment, but such swings are increasingly becoming the norm.

LSGO flat prices, cracks and timespreads remain extremely volatile, with futures contracts trading in a near $60/mt range on Friday versus static crude and the Oct/Nov LSGO timespread falling a whopping $14/mt to $21/mt.

While speculative trading and algos indulged in trading crack spreads, on the fundamental side a weekend of 18-22C weather in northwest European capitals mean demand for heating oil is sluggish.

Demand is also sluggish in the US, with EIA data showing deliveries down 8.7% on the year to send NY ULSD Harbor prices below $3/b for the first time in months.

Longer term fears are evident as well with US Treasuries hitting 17-year lows amid what analysts believe is a "higher for longer" interest rate policy to quell inflation.

Data from Germany painted a more bullish picture, with industrial orders in August up almost 4% versus expectations of a more modest 1.5% rise.

And sinking water levels along the Rhine may also provide some support.

But still stocks rose in ARA and they only fell in the US because of a rise in exports.

Asia

What happens in Europe echoes in Asia usually, but the EFS narrowed sharply on lower European prices, meaning Asia didn't fall as much as European values.

Starting the week at -$53/mt, by Friday the front month EFS – Singapore swaps minus European futures - had risen almost $20/mt, making it far more attractive to keep barrels east of Suez and offsetting economic benefit from the narrowing of the backwardation in Europe.

Singapore FOB cracks versus Brent have slumped $9/b and are at a near 2.5-month low and the front month backwardation has almost halved to $2.20/b since Monday.

The market doesn't appear to think a slowing Chinese economy will see rising exports, which analysts say they should, particularly given stocks in Singapore hit a two-year high of just shy of 10 million barrels last week.

"This might be because refiners retained diesel volumes for the seasonal peak in domestic demand post-monsoon season," FGE analysts said.

"That said, given the prolonged real estate crisis and tight cash flow limiting the progress for some construction projects, this seasonal boost in demand has been weaker than usual. Chinese diesel exports should thus pick up amid favourable export margins," they said.

They looked a lot less favourable on Friday versus Monday, but with international gasoline prices slumping due to an eye-watering stock build in the US, they are more attractive than the top of the barrel.

A big question will be whether refiners will be able to shift export quotas from residuals to the middle of the barrel as doing so could pile pressure on the EFS.

FGE expect diesel flows from China should increase by 70,000 bpd on October levels to reach 335,000 bpd next month and increase by another 25,000 bpd in December to 360,000 bpd.

The average so far this year has been 300,000 bpd.

Jet

As LSGO slumped $130/mt from Friday to Thursday, the jet regrade rose marginally to above $60/mt in northwest Europe.

That left flat prices pegged at $930.25/mt CIF NWE by Thursday, down $124/mt.

Refining margins are at their lowest since the end of July and intermonth spreads (M1/M2) have more than halved to $17/mt.

The east-west has narrowed slightly, from -$70/mt to -$57/mt over the course of the week.