Middle Distillates
Market Overview
Diesel - Arbs, Diffs, and Spreads
Despite a brief reprieve in EIA inventory data, diesel stocks continue to draw towards workable minimum levels, as the US remains the barrel of last resort for the global distillate market.
Given continued bullish gains in RVO, alongside increasing demand for USGC origin diesel, HOGO is likely to continue to strengthen.
USGC arbs remain workable to much of the global import destinations, including NWE, MED, WAF, and LATAM, with exports likely to remain strong as global inventories continue to decline.
Should export restrictions on refined products be implemented, the impact on diesel prices would be the most outsized, likely resulting in a dramatic weakening of HO spreads, cracks, and HOGO.
However, a key risk remains for HO, as rumors of a US refined product export ban over the summer pose a significant risk to HOGO pricing, given the export-oriented nature of US supply and demand balances.
Jet - Crisis appears temporarily subdued
USGC Jet 54 swaps have traded at a negative differential to HO swaps since the start of May.
This has allowed jet exports to remain at record high levels, as the US continues to act as the global barrel of last resort for Europe, Singapore, and Latin America.
As global refineries begin to shift yields away from jet, despite material declines in global demand, there may be some upside for global jet prices, as refineries reconfigure towards diesel and gasoline.
Arbitrage flows from the Far East have reopened, driven by the recent declines in the Singapore regrade. Given our bullish outlook on the Singapore regrade, we expect the USWC arb to close over the short to medium term, which should put a floor in USWC jet differential.
