Q4 diesel stronger than futures market suggests

Light Ends: Global naphtha cracks rose w/w as naphtha lagged declines in crude, despite waning blending demand, particularly in NWE. Indeed, high LPG prices relative to naphtha continue to boost its appeal in the petchem sector and are helping to unseasonably support naphtha prices. With US LPG export facilities running near capacity, delays and restrictions could be impactful despite the storm’s primary impact being felt east of the main export facilities.

Gasoline: Low gasoline cracks, particularly in Europe, are raising the prospect of run cuts and allow for some recovery. Even if a recovery materialises it will be capped by the greater supply in the Atlantic basin, although this could be curtailed by hurricane Francine. Asian markets are more stable but still well-supplied and likely to remain so. Although, the possibility of more Chinese export quotas could drag markets lower despite evidence of greater demand in the wider East of Suez region.  

Middle Distillates: The global gasoil market remains well-supplied, with NWE demand still reliant on cargoes from the Middle East and India. Despite declining volumes and higher cleaning costs, larger vessels remain preferred for East-to-West shipments due to favourable freight economics. In the East, China is poised to increase gasoil exports in Q4, potentially weighing on Singapore cracks amid limited demand drivers. As Q4 approaches, gasoil seems undervalued, with the market slipping into contango, tighter supply balances expected due to refinery maintenance, and refiners shifting their focus to jet fuel and kerosene production.

Residue: Despite the reduced availability of tradable VGO in the global market, VGO cracks have lost support since April and failed to recover in the summer months. The dominant driver for VGO cracks is no longer on the supply side but on the demand side. Weak gasoline and diesel demand has held back VGO feedstock demand in general. Also, newly commenced secondary refinery units this year have changed regional gasoline and diesel balances while allowing VGO for internal use instead of exports. As these factors remain in place, VGO cracks will continue to struggle in the near term.

Demand: The latest Indian oil ministry data revealed an unexpected y/y drop for gasoil/diesel demand in August, pointing to inclement weather effects. Domestic gasoline consumption was largely unaffected, however, with August figures showing yearly gains of some 70 kbd.

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