September Pricing Analysis - Asia Middle Distillates

SUMMARY

Singapore middle distillates extended their rally in September, with gasoil holding its premium over jet throughout, though both remain below the March and April peaks seen at the start of the US-Iran war. Cracks remain firmly elevated as a fresh round of supply shocks hit an already strained distillates market. The Saudi East-West pipeline outage removed a key Hormuz bypass, and Russia's extended diesel export ban tightened supplies in Europe further and driving a mid-month peak that unwound once the pipeline resumed loading. Europe's search for replacement barrels kept Singapore at a deep discount to NWE, opening the door for South Korean jet to move west. Heading into October, Trump's stance on US diesel exports and China's export levels will be the key swing factors for the complex.

MARKET ACTIVITY

Swaps

• September saw 112 gasoil swap trades totaling 5,600 KB, a 78% increase from August's 63 trades and 3,150 KB. Dare International sold 67 of the 112 lots (59.8%), up from 50.8% in August, against 14 buys. It finished at -2,650 KB, the largest net short in the book The buy side went to Gunvor, which took 52 of the 112 buys (46.4%) against 4 sells and ended net long with +2,400 KB. Prior to September, Gunvor only sold 50kb of gasoil swaps.
• Jet swaps fell to 22 trades on 1,100 KB from August's 25 trades on 1,250 KB, with market activity thinning to 91 bids and 70 offers from month-on-month levels of 117 and 100.

Physical

• The physical gasoil window saw 62 bids and 51 offers but translated into only 3 trades, compared to August's 56 bids, 38 offers and 12 trades. Bids were led by Gunvor (22, up from 4 in August), Unipec (15), Trafigura (11) and BP (8). This places Gunvor as the top buyer on both paper and physical gasoil. Offers rotated away from August's Unipec (14) and Trafigura (10) toward Vitol (14), Sahara Energy (12), Glencore (8), Unipec (7) and Chevron (7).
• Physical market activity for jet was limited to 37 offers to 10 bids (3.7:1), compared with August's 5.6:1. Offers came mainly from Glencore (15), Vitol (11) and UIT (5). Two deals were done in the window, both with Glencore selling: to UIT at -$0.40/bbl for 26–30 September, and to Vitol at +$0.35/bbl for 22–26 September.

PRICE ACTION

• For the month of September, gasoil averaged $177.78/bbl vs August's $156.46/bbl while jet averaged $169.30/bbl against August's $148.37/bbl. Prices for gasoil and jet debuted at $163.69/bbl and $156.46/bbl respectively before landing at $173.22/bbl and $168.39/bbl on 30 September. Both products printed their monthly low on 1 September while peaking on 11 September at $187.51/bbl for jet and 16 September at $200.29/bbl for gasoil.
• The bulk of the price rally was observed on the week of 14-18 September as a culmination of supply chain shocks disrupted the middle distillates complex. Persistent factors such as the low water levels in the Rhine River and the US-Iran tensions continue to maintain supply chain uncertainty while newer pressure points such as the attack and outage of the Saudi East-West pipeline (12 September) and Russia's extension of diesel export bans until the end of October (15 September), threatened to further tighten an already strained global energy market.
• The closure of the Saudi East-West pipeline is especially significant against the backdrop of the ongoing impasse in the Straits of Hormuz and had served as a means of bypassing the Strait. As of 22 September, the pipeline has resumed oil loading at Yanbu though estimates anticipate the full resumption of flows would take an additional month. Trump's consistent contemplation on potential US diesel export bans (first made on 22 September) have also contributed to market uncertainty, though US officials have thus far denied plans for a blanket ban on diesel.

Jet Fuel Singapore FOB Cargoes

Gasoil 10ppm Singapore FOB Cargoes

CROSS-MARKET DYNAMICS

• Persistent tightness in the diesel and jet markets has not allowed the crack to crude to loosen and they remain firmly at historically elevated levels. Middle distillate M1 cracks to Dubai widened on average in lieu of supply uncertainty and edged higher from start to end of the month. Jet averaged $71.27/bbl vs August's $64.48/bbl, starting the month at $65.20/bbl and ending at $69.61/bbl while similar patterns were observed for gasoil, averaging $74.35/bbl vs $67.43/bbl, moving from $67.20/bbl to $72.28/bbl. With Dubai M1 rising $10.41/bbl against jet M1's $14.82/bbl and gasoil M1's $15.49/bbl, rising crack levels can be attributed to greater tightness in the middle distillates complex over crude.
• Regrade levels for the month of September have remained firmly gasoil favored. The M1 regrade moved from -$2.00/bbl to end the month at -$2.67/bbl, averaging -$3.08/bbl against August's -$2.95/bbl. Gasoil held a premium in 21 of 22 sessions. The only jet-premium print was +$2.39/bbl on 11 September, and the widest was -$5.47/bbl on 22 September. Higher gasoil cracks and gasoil skewed regrade levels are indicative of the comparative demand for gasoil to jet, especially with the tapering off of the summer season and travel demand.
• The slight increase in regrade levels may have been reflective of jet fuel consumed by travel demand derived from China’s National Day Golden Week from 1 to 7 October, with expectations of an increase in 3.6% of passengers for Chinese airlines as estimated by the Civil Aviation Administration of China.

CROSS-REGIONAL DYNAMICS

• The distillates complex is primarily led by demand cascading from the West, as East of Suez can secure sufficient supply within the region. This results in notable differences in pricing levels as Europe sought to draw sorely needed cargoes to replace the missing cargoes from Russia and the Middle East.
• The GX calculated gasoil M1 EFS spread averaged -$173.1/mt vs August's -$124.5/mt, deepening Singapore's discount to NWE. From start to end of the month, however, it narrowed from -$198.2/mt to -$149.3/mt, as Singapore gasoil M1 rose 10.0% against ICE LSGO Singapore assessments' 4.9%.
• Jet East-West averaged -$222.1/mt compared to levels seen in August at -$147.6/mt and finished flat from start to end at -$225.2/mt; the NWE jet diff jumping to $130/mt on 30 September erased the narrowing seen through the rest of the month. According to data provided by analytics company Vortexa, almost double the amount of seasonal jet flows were observed flowing from South Korea to Europe for the month of September at 127.8kbpd and may suggest active exploitation of the current arbitrage opportunity.
• The Jet Trans-Pacific arb between Singapore and Los Angeles swung $106.7/mt, from -$180.5/mt to -$73.8/mt and averaged -$69.3/mt against August's -$107.2/mt. The spread printed positive only on 28 September (+$14.3/mt), briefly putting Singapore at a premium to USWC, before a 4.4% rise in LA jet on 30 September pushed it back to -$73.8/mt.

CURVE STRUCTURE

• Forward curves for both products stayed backwardated, with M1 gains running 1.5–1.6x those of M12. Gasoil M1 gained $15.49/bbl compared with M12's $9.62/bbl, and jet M1 $14.82/bbl against M12's $10.02/bbl. M1-M12 backwardation widened 1.15x for both grades, a clear indication of near-term supply uncertainty.

PRICE VOLATILITY

Jet Fuel Singapore FOB Cargoes

Gasoil 10ppm Singapore FOB Cargoes

• September's Coefficient of Variation rose to 5.44% (jet) and 5.97% (gasoil) from August's 4.43% and 4.57%, the six-month lows. It stays at half of July's 12.18% and 13.23%.
• Gasoil CV exceeded jet CV for the sixth consecutive month, consistent with gasoil carrying the marginal tightness in the complex.

SOMETHING TO WATCH

• Upcoming October export levels from the Chinese will indicate if they are confident in securing available crude cargoes, given the limited amount of Iranian crude available on water and gradual recovery of the Saudi pipeline flows.
• Trump’s position on the diesel export ban, regardless of the form it takes will have an extensive impact on diesel flows especially with how strained Europe is in terms of available sources. A partial or blanket ban may result in having Europe having to lean more heavily towards alternate sources such as South Korea and India. The nature of the refining process would mean a diesel export ban would affect run rates and hence adjacently produced products such as jet and gasoline.

Note: All figures, prices and market activity referenced in this report are based on the period covered by this monthly update.