Sustained weakness in East-West arbitrage economics, coupled with softer demand in Asia and Northwest Europe has pushed the benchmark FOB Singapore 10 ppm sulfur gasoil cash differential to a six-month low, but industry sources expect demand to rebound on low inventory.
Platts assessed FOB Singapore 10 ppm sulfur gasoil cash differential over Mean of Platts Singapore gasoil assessments at a discount of 31 cents/b at the Asian close Nov. 21, down 12 cents/b on the day and tumbling from premium of $1.55/b at the start of the month, S&P Global Commodity Insights data showed.
The cash differential was last lower on May 15 when it was assessed by Platts at minus 41 cents/b to the MOPS gasoil assessments, FOB Singapore.
Weakness in Asian gasoil prices was also reflected in the derivative markets, where the front-month December-January swap narrowed 23 cents/b on the day to plus 61 cents/b at the Asian close Nov. 21, tumbling 40.66% since the start of the month when it was assessed by Platts at $1.50/b, S&P Global data showed.
"East-West arbitrage lanes are still shut even though Europe usually buys gasoil for winter heating around this time of year, so the barrels are stuck [in] East [of Suez]," said a regional gasoil trader.
The front-month gasoil exchange of futures for swaps spread -- a barometer of East-West arbitrage flows -- was assessed by Platts at minus $27.80/mt at the Asian close Nov. 21, widening 8 cents/mt on the day, indicating low incentive to send barrels West.
"Europe can use LNG for [winter] heating. They don't have to use gasoil or kerosene," a refinery source based in Northeast Asia said. "Energy prices are also rising in Europe plus there are recession fears so demand in Asia is better than Europe even though it is also soft."
Near-term optimism
Still, some industry sources were hopeful that low inventory levels could spur near-term demand from Europe.
Diesel and gasoil stocks in the Amsterdam-Rotterdam-Antwerp refining hub, as measured by Insights Global, fell 2.2% in the week to Nov. 17 to 1.684 million mt, marking a fresh 13-month low, S&P Global reported late Nov. 18.
Current stocks are the lowest since Oct. 20, 2022, and are down 0.5% from the levels around same time last year.
Moreover, this will be Europe's first winter without Russian diesel supplies after sanctions kicked in Feb. 5.
"If we get a regular [cold] winter, we will be in a supply deficit as inventories of diesel are still very low. The best chance for supply surplus is either a major recession or a warmer-than-normal winter, neither of which right now look that promising," Phil Flynn, senior account executive at Price Futures Group, said in a Nov. 22 note.
Softer regional demand
Meanwhile, regional demand has softened as volatile arbitrage economics had resulted in more cargoes being trapped within Asia, with some swing barrels from India being channeled towards other parts of Asia.
"Regional demand is soft but I wouldn't say it is weak. Australia and Southeast Asia are not absorbing as many barrels but demand is still slightly better than in Europe," a second regional gasoil trader said.
Australia is the region's biggest outlet for ultra low sulfur gasoil, importing 16.9 million barrels of gasoil in September, down 6.14% on the month and 3.91% on the year, latest preliminary data from the Department of the Environment and Energy showed.
Platts, part of S&P Global, uses a conversion factor of 6289.81 to convert the original data -- expressed in megaliters -- to barrels.
Industry sources said diesel imports will likely remain stable as Australia continues to work towards bolstering its fuel reserves.
The second phase of the government's minimum stockholding obligation will take effect in 2024 and aims to raise baseline stocks of diesel to 32 days from 20 days currently.
According to data from Australian Petroleum Statistics, 20 days' worth of diesel translates to 1,747 megaliters, or 10.99 million barrels.
Looking ahead, the Platts-assessed Q1-Q2 2024 gasoil swap spread, an indication of medium-term sentiment, widened 8 cents/b on the day to $2.16/b at the Asian close Nov. 21, S&P Global data showed.
"Global Q4 2023 [gasoil] demand growth is set to pick up to 464,000 b/d on the year, driven by China, South Asia, Eastern Europe and Latin America," S&P Global analysts said.
"In 2024, mainland China and South Asia are projected to see growth of 70,000 b/d and 82,000 b/d, respectively, with total Asian gasoil demand growth at 213,000 b/d."
