Middle Distillates

Market Overview

SG 10 E/W whipsaws, weakening in the cards

Diesel

The sudden increase was when China unceremoniously announced a suspension to product export quotas in October, followed by news of the G7 release of 100 mb of SPR barrels (crude and diesel), most of which is expected to be frontloaded by diesel and a commitment from US to avoid a ban.

SG 10 E/W has been subject to extreme movements, much like the HOGO that was affected by the proposed US diesel export ban.

The sudden weakness was due to the rise in ICE GO from an almost unimaginable tightness in Europe if US truly did ban exports. SG 10 E/W needed to make the Asian arbs work into Europe.

Sparta base case is for China to allow some diesel exports again after the Golden Week which should weaken SG 10 E/W back to the sub-100$/t levels.

Sikka barrels not clearly pointing West now

Diesel

With the strengthening SG 10 E/W, Indian barrels arb margins are almost indifferent heading either to Rotterdam or to Singapore.

From our arbs dashboard, Ulsan barrels are no longer making economic sense to flow into Rotterdam.

This gives us a higher conviction trade on weakening of the SG 10 E/W if details of the EU SPR release takes longer to come into the market or is volumetrically unable to offset the reduced flows from the Middle East due to refinery issues.

Jet arbs to USWC shut but should reopen

Kero

Jet arb margins from Korea and Singapore went negative, not seen since earlier this year as the E/W strengthened.

Additionally FOB premiums in Korea were stronger because the refining system there was struggling with lower crude intakes due to the impact from the diversion of Saudi crude flows via Sidi Kerir that happened back in August.

If China allows jet exports again, jet balances in Asia will be more relaxed and likely reopen the USWC arbs comfortably.