Middle Distillates
Distillates
Asian run cuts will have to accelerate over the coming months.
Asia and E/W is currently pricing to get rid of marginal barrels from e.g. the USGC, which will be needed in the near future when Asian supply is cut further.
Demand may also be "encouraged" now by a steep drop off in flat prices (already filtering through to pump prices).
Wild cards are numerous:
• Ukrainian drone assault is one and would impact ICE GO first, then HOGO.
• Chinese exports of middle distillates are also a key unknown!
• Rumours abound of a potential lifting in disty export in May from China.
To an extent the regrade might be making up for recent weakness in the diesel E/W, trying to re-open arbs from Sikka.
Asian run cuts need to accelerate. If our call on long diesel E/W does play out then the draw on Western distillate will also accelerate.
US distillate stocks are already starting to draw hard and this will be set to continue the worse Asia’s situation gets.
Europe has for now access to gasoil SPR and “enough” crude relative to Asia. But imports are still below norm and may get worse, calling more on the US market which will be stretched by Asia and Brazil. Again Ukraine attacks make matters worse.
These levels are still tempting to short! However, it will be difficult to short into decreasing imports and rising summer demand.
Airlines are of course cutting flights, which will cap regrades at some level. Of course, the cutting of capacity is basically just (pre-emptive) demand destruction, which is also what has happened over in Asia (on all fuels).
We have also seen substantial yield increases in jet in the US (with Europe likely doing the same).
In terms of arbs, a somewhat weaker regrade recently (in line partly with weaker diesel spreads) has put Sikka-LR2-NWE via Cape at risk.
USG-Rott jet arbs are also at risk. Even with US stocks stable (on high yields!)
