Asian middle distillates reel from coronavirus, but widening EFS fuel hopes

Singapore — Asian middle distillate stocks are likely to remain under pressure this week as the coronavirus outbreak hammered demand, but a widening Exchange of Futures for Swaps, or EFS, spread could aid sentiment, trade sources said Monday.

Market participants said the week ahead largely remained shrouded in uncertainty, amid little clarity on how the coronavirus would impact the demand and supply fundamentals.

"Fundamentally, in a normal year, gasoil at this time should be looking pretty strong, but as things stand, we are expecting more gasoil export volumes from China even though they have announced run-cuts at refineries," a trader said, adding that the plummeting demand for oil in the country will likely far outweigh the country's refinery run-cuts.

Mirroring the bearish sentiment, the cash differential for the FOB Singapore 10 ppm sulfur gasoil grade has been on a decline since the start of February. At the Asian close Friday, the cash differential for the benchmark Asian ULSD grade slid 5 cents/b to finish at plus 60 cents/b to the Mean of Platts Gasoil assessments, FOB.

Meanwhile, the FOB Singapore gasoil physical crack spread against front-month cash Dubai also shaved off 36 cents/b to close Friday at plus $12.78/b, Platts data showed.

Still, some market participants were hopeful that a widening front-month EFS spread might soon provide a floor for the middle distillate.

At 0830 GMT Friday, the spread was assessed at minus $10.14/mt, widening by 75 cents/mt from Thursday and at 0300 GMT Monday, brokers pegged the front month March EFS at minus $10.75/mt.

"While arbitrage economics are not super fantastic at the moment, it will be more painful to sell barrels next month, so selling to Europe is a least-loss option," a Singapore-based trader said.

Market participants also said that a fire reported last week at ExxonMobil's Baton Rouge refinery in Louisiana, US, may offer some support.

"It's the fifth biggest refinery in the US, so there could be less gasoil going into Europe from the US, so there is some upside if Asian barrels are drawn into Europe," a trader with a Chinese trading house said.

Jet outlook remains bleak

Over in the jet fuel/kerosene market, demand destruction for the aviation fuel as a result of the coronavirus outbreak has led to a persistently bearish market outlook.

According to the UN's International Civil Aviation Organization Thursday, global airline revenue is estimated to potentially plunge by $4-$5 billion as a result of the flu-like virus, as nearly 70 airlines have cancelled all international flights to and from China, with a further 50 airlines curtailing related air operations.

ICAO estimates an overall reduction in passenger capacity by about 39-41% and noted that the impact of the coronavirus is expected to be greater than that caused by the SARS epidemic in 2003.

The bleakness was borne out in sliding cash differentials for FOB Singapore jet fuel/kerosene, which fell to its lowest level in over two months at minus 28 cents/b to MOPS jet fuel/kerosene assessments at the Asian close Friday, after dipping into discount territory February 13.

Platts data showed that the last time it was assessed lower was on December 9, 2019, at minus 42 cents/b.

In the derivatives market, the front month March/April timespread remained in contango at minus 28 cents/b at the Asian close Friday, widening 4 cents/b on the day. The spread has widened 10 cents/b since the beginning of February, Platts data showed.

As of 0300 GMT Monday, brokers pegged the front month jet fuel/kerosene spread at minus 24 cents/b.