Middle distillates tighten, Eastern gasoline to firm while light ends will struggle

Light Ends:

• Moderately bearish West of Suez cracks as blending demand is supportive but high stocks and fading petchem margins offer resistance.
• Bearish East of Suez cracks as refinery maintenance is a month away and petchem demand remains subdued before new standalone crackers ramp up this spring.
• Bearish LPG as cold spells taper in the US and lackluster demand continues in China and Europe.

Gasoline:

• Neutral West of Suez cracks: Atlantic Basin cracks reached a small peak on Friday, culminating a week dominated by tariff uncertainty at multi-month highs, but the momentum failed to carry over into this week. Fundamentals still point to considerable length, with stocks at comfortable levels and seasonally poor demand keeping balances in surplus and cracks in check. Refinery maintenance and closures will provide some relief, but sustained support is still a couple of weeks away.
• Neutral to bullish Asian gasoline: despite still holding at a discount to the West, the Singapore crack clocked another weekly gain amidst deteriorating export incentives for Chinese refiners and still constrained refinery operations in the wider region (including maintenance in the Middle East). This, alongside strengthening seasonal demand, should keep the Asian gasoline balance in the red, informing our constructive stance on the Singapore crack in the weeks ahead.

Middle Distillates:

• PADD 1 strain supports prompt WoS cracks: Rare reverse arb helps clear excess ARA stocks.
• Forward ICE Gasoil looks overbought: Balances expected to ease by H2 2025 into 2026.
• China's Feb cargo program cuts suggest Singapore market could tighten: 80 Kt reduction hints at constrained supply.

Residue:

• Bullish Atlantic Basin VGO as global supply tightens and feedstock demand returns.
• Steady VLSFO markets in EoS as supply overhang continues to weigh.
• Bearish Hi-5 spreads as demand momentum for HSFO outpaces VLSFO.  

Light Ends: Naphtha cracks due for a near term cool down while LPG demand fizzles

Light naphtha cracks ($/bbl)

Source: Kpler calculations using Argus Media prices

Naphtha cracks rose globally w/w, as blending demand begins to pick up and refinery maintenance in the US and Europe limits supply. However, the reported ramp-up of Dangote to full rates by H2 March (which may prove ambitious according to our books) is helping to prevent further upside, combined with high naphtha stocks in ARA, Singapore, and UAE. The European market is also seeing inland supply constraints due to ongoing refinery disruptions in Germany (Bayernoil’s Vohnburg-Neustadt and Miro’s Karlsruhe facilities), though these refineries are set to restart soon.

NWE and NEA propane - naphtha physical differential (%)

Source: Kpler calculations based on Argus Media prices

Flexible crackers in Asia favor naphtha on paper as spring refinery maintenance has yet to pick up and USGC propane remains elevated due to cooler weather. Further deterioration of Russian balances and subsequently exports to the east will limit supply in the region, though continued demand weakness will limit upside for cracks. Lotte Titan’s naphtha cracker in Indonesia is now due to ramp up in June instead of March, delaying a roughly doubling of Indonesian demand. China’s Maoming Petrochemical 640 kt/year cracker will shut for a 6-week maintenance beginning mid-March, and South Korea’s 915 kt/y YNCC No. 2 cracker will also be down for maintenance from 10 February to 4 April, though overall cracker maintenance is light so far this year.

Asian steam cracker maintenance and run cuts by country, kt of ethylene (LHS), estimated cracker utilization rate, % (RHS)

Source: Kpler calculations using Argus Media data

Looking ahead, US ethylene prices are retreating as crackers restart after cold weather disruptions, placing downward pressure on WoS steam cracking margins in the coming weeks, as US exports pick up, with refinery maintenance in Europe and blending demand picking up in March to help provide a floor. East of Suez, weak demand and limited refinery maintenance will pressure cracks over the next two weeks, until new standalone crackers ramp up and refinery maintenance accelerates in March.

Global naphtha cracks ($/bbl)

Source: Kpler calculations based on Argus Media prices

LPG

The USGC-NWE propane arb has been closed on paper most of the year, but a brief opening in December contributed to near-record propane US exports to NWE in January, helping propane remain preferred over naphtha by flexible crackers in Europe. Natural gas prices in Europe continue to climb, pulling LPG into the gas stream and pressuring petchem producers with higher feedstock and energy costs. VLGC freight rates have softened in part thanks to closed USGC-Asia arbs, setting the scene for a bump in US exports as USGC prices ease following several cold spells over the past month.

China’s PDH utilization remained steady w/w at 76% according to an industry report, the highest levels since October, though margins remain under pressure. Two new PDH plants in China, Wanhua’s 900 kt/y No. 2 unit and Guoheng Chemical’s 660 kt/y unit, achieved on-spec production in early February, adding incremental propane demand (+47 kbd propane at 75% utilization). However, the two other planned PDH projects due online in 2025 (Fujian Zhongjing and Sinopec Zhenhai, a combined 48 kbd at 75% utilization) have been delayed due to poor margins and tariff uncertainty.

Chinese gross PDH margins per ton of propylene and polypropylene, LHS ($/t), Chinese propylene prices, RHS ($/t)

Source: Kpler calculations using Argus Media prices

South Korea’s PDH sector also remains under pressure, with all plants in the country currently shut for maintenance or longer-term mothballing. The latest is Hyosung’s No. 2 PDH unit (300 kt/y, 12 kbd propane demand at full rates), which entered a 35-day maintenance period on 5 February (Argus).

Looking ahead, propane demand in China could see some post-Lunar New Year recovery as stocks are replenished, though low PDH margins will likely limit a strong rebound. USGC propane arbs will widen over the next two weeks as USGC prices retreat after recent cold spells, though with Chinese PDH projects experiencing delays and cancellations, European crackers dealing with falling margins as US ethylene output rises, and seasonal heating demand tapering off in the coming weeks, LPG prices in Asia and Europe will be under pressure.

Gasoline: Cracks mixed as last week’s momentum fades

Global Gasoline Cracks ($/bbl)

Source: Kpler based on Argus Media

West of Suez

In the US, the RBOB crack was up by $1.05/bbl w/w to $9.50/bbl, whereas the Gulf Coast crack added $0.50/bbl to $10.80/bbl. The latest US Energy Information Administration (EIA) data released yesterday showed total motor gasoline inventories drew by about 3.0 Mbbls to 248.1 Mbbls, standing 1% below the seasonal five-year average, as seasonal refinery offline capacity peaked (IIR) on the back of Gulf Coast turnarounds.

US: Weekly gasoline inventories (Mbbls)

Source: EIA

Indeed, this was the first draw in thirteen weeks, led by destocking in the Gulf Coast, while West Coast stocks also shrank further. By contrast, inventories on the East Coast are now above the seasonal average and at a multi-year high, constraining the flow of cargoes into the region.  

US: Weekly PADD-1 gasoline inventories (Mbbls)

Source: EIA

Over the rest of February, refinery maintenance should dwindle before picking up again in March, but country-wide destocking has likely been set in motion ahead of the switch to summer-grade gasoline. Still, we expect a more sustained pick up in the cracks come March, as demand picks up substantially driving the US gasoline balance into a deficit.

Across the Atlantic, European benchmark cracks diverged, with the Northwest Europe (NWE) crack up by $0.60/bbl w/w to $11.85/bbl, while the Mediterranean (Med) crack lost $2.05/bbl w/w to $9.15/bbl. European gasoline exports are on track to rebound this week but remain lacklustre on a monthly basis, with the transatlantic arbitrage still hard to work and a contango structure incentivising sky-high gasoline inventories at the Antwerp-Rotterdam-Amsterdam (ARA).  

Freight Adjusted Arb Incentive: 3DMA of Gasoline reg RBOB NYH barge fob 20 days fwd vs Gasoline Eurobob non-oxy NWE barge ($/bbl)

Sources: Kpler calculations using Argus Media pricing, McQuilling freight data; Shipping costs calculated based on MR freight rates

ARA: gasoline stocks in independent storages (Mb)

Source: Kpler calculations based on Insight Global data

News this week that the decommissioning process at Scotland’s Grangemouth refinery is underway and is expected to be completed by May, whereas Nigeria’s Dangote is aiming to quickly ramp up operations (see our take here) have done little to assuage concerns over persistent length in the continent.

We maintain our view that cracks will remain rangebound over the next couple of weeks, with a more sustained recovery in the books over March/April when balances start to shrink and the change to summer spec takes hold. 

East of Suez

The Singapore gasoline crack was up by $0.60/bbl w/w to $8.40/bbl. A sharp drop in China-Singapore arbitrage spreads is set to translate into lower Chinese gasoline exports this month, with lower supply and strengthening demand across Asia keeping balances tight, and supporting crack values.

What is more, the fact that US West Coast stocks are now standing more than 10% below the five-year average is helping to drive the transpacific arbitrage seasonally wider, drawing in Asian barrels and adding another bullish factor to the East of Suez gasoline complex.  

US: Weekly PADD-5 gasoline inventories (Mbbls)

Source: EIA

Freight Adjusted Arb Incentive: 3DMA of Gasoline reg CARBOB LA pipe fob month vs Gasoline 92r Singapore ($/bbl)

Sources: Kpler calculations using Argus Media pricing, McQuilling freight data

Middle Distillates: Positive momentum amid maintenance, but risks loom

West of Suez

ARA: gasoil/diesel stocks in independent storages (Mbbls)

Source: Kpler calculations using Insights Global data

It has been easy to make a bullish case for gasoil amid peak maintenance season, which totals 4.51 Mbd of offline capacity this month. The accelerated closures of the 150 kbd Grangemouth and the 268 kbd LyondellBasell Houston refineries have further tightened the prompt just as US weekly implied demand is hovering at multi-year highs of around 4.6 Mbd.

Meanwhile, pipeline constraints and cabotage restrictions have forced PADD 1 buyers into a rare reverse arbitrage from NWE since the start of the year. This has provided relief for NWE refiners, who have been saddled with a glut of excess product ahead of the transition back to summer grade gasoil at the end of Q1. ARA stocks are 10% higher than typical seasonal averages at 18.23 Mbbls (Insights Global). To further supplement supply, some AG cargoes have also been redirected to PADD 1.

Moreover, the latest round of sanctions relating to Russian oil exports continues to drive length taking in the ICE Gasoil futures market. While we initially projected 300 kbd of run cuts this month – equal to 80 kbd of lost gasoil output – over 800 kbd has gone offline following drone strikes on the Volgograd, Ryazan, Sarato refineries this year. Russian exports have now declined for two consecutive weeks.

Looking ahead, ICE Gasoil appears overbought, especially further along the forward curve. The 12-month time spread is trading at a one-month high of around $55/t, and it is difficult to justify this especially as balances are set to ease come H2 2025 and 2026 as more refining capacity ramps up. The Dangote refinery, once fully ramped up and producing ULSD-spec cargoes, will be well-positioned to address NWE shortages. Additionally, East-West flows through the Suez Canal have slowly resumed, reducing the likelihood of prolonged supply-demand dislocations. Further down the line, Russia’s planned 80 kbd Tuapse hydrocracker startup – especially if a ceasefire in Ukraine materializes—could further shift market dynamics.

ICE Gasoil multi-month spreads ($/t)

Source: Marketview

East of Suez

The Singapore gasoil spot market has been relatively subdued, overshadowed by decent kerosene demand in Japan this heating season and wide-open jet arbitrages to both the US West Coast and Northwest Europewide-open jet arbitrages to both the US West Coast and Northwest Europe. However, we expect Singapore gasoil cracks to recover soon as Chinese export incentives have weakened. Independent refiners in China are struggling due to fresh Iran sanctions and a fuel oil import tax hike from 1% to 3%, which has increased feedstock costs. Market sources indicate that Chinese refiners have already scaled back their February gasoil export plans from an initial 670 Kt to just 590 Kt.

China-Singapore arbitrage incentive ($/bbl)

Source: Argus Media Pricing

Residues: VGO markets rally as global supply fades

West of Suez

European VGO cracks vs Brent M1 ($/bbl)

Source: Kpler calculations based on Argus Media

Atlantic Basin vacuum gasoil (VGO) cracks have rallied in recent weeks on the back of tightening supply and robust demand. Global VGO imports are on track to sink to a record low of 1.55 Mt in February, extending a pattern of decline that began about a year ago as conversion capacities globally increased. Slightly more upside is in store for VGO cracks as global exports continue to trend lower and refinery maintenance in the US gradually slows in the coming months. Higher primary refining capacity maintenance in Europe, coupled with limited secondary unit turnarounds should keep Atlantic Basin VGO margins supported over the coming weeks (IIR).

East of Suez

Regional VLSFO cracks ($/bbl)

Source: Kpler calculations based on Argus Media

Asian VLSFO benchmarks recently dipped amid suggestions of resumed Dar Blend crude oil exports which would notably contribute to the supply of VLSFO in the Middle East and Asia (more here). Ample supply and lackluster bunkering demand have pressured Asian VLSFO benchmarks in recent months and there is little reason for optimism ahead.  

First, VLSFO bunkering demand continues to suffer at the expense of rising HSFO consumption. Second, VLSFO production from Kuwait’s Al Zour refinery is set to ramp up as it concludes turnarounds at its hydrotreaters in March (which were delayed from mid-February, according to IIR). Resumed Dar Blend crude oil exports would also add to the overall VLSFO supply pool, pressuring prices until the utility demand season starts to ramp up in early Q3.  

Coupled with firm HSFO markets amid persistently tight supply, Hi-5 spreads are set to remain depressed over the near term as demand continues to skew towards HSFO.

Regional Hi-5 (VLSFO vs HSFO) spreads ($/t)

Source: Kpler calculations based on Argus Media

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