Firming Asia regrade spread unlikely to spur shift in middle distillate refinery yields

The recent strengthening of the FOB Singapore physical and derivative regrade spread is unlikely to incentivize refiners -- who have mostly been maximizing the production of gasoil through 2023 to-date -- to shift yields toward higher production of jet fuel/kerosene in the near term.

The Platts-assessed FOB Singapore physical regrade -- the spread which measures the value of jet fuel over 10 ppm sulfur gasoil -- narrowed 30 cents/b on the day to a two-month high of minus 73 cents/b at the Asian close March 13, marking its highest level since Jan. 11, when it was assessed at plus 20 cents/b, data from S&P Global Commodity Insights showed.

The front-month derivative regrade spread reflected a similar trend, narrowing 32 cents/b on the day to minus $1.37/b in October, S&P Global data showed, with the spread last seen higher on Jan. 22 at minus $1.33/b.

Industry sources expect the regrade spread to continue firming in March, tracking diverging fundamentals in the Asian middle distillate complex with gasoil demand lagging behind that of jet fuel/kerosene.

However, sources highlighted that fundamentals could shift in favor of gasoil in April and May, as refinery turnaround activity peaks, easing current oversupply of gasoil in the region.

"The market is split on gasoil demand and supply now but there should be fewer cargoes in April because of refinery turnarounds," a regional gasoil trader said.

With arbitrage economics to move Asian gasoil barrels to the West still seen unworkable, resupply volumes into Asia have been increasing, but some market participants were hopeful that the East-West arbitrage could see a measure of support in the near-term as cash differentials for Straits-loading gasoil sinks into deeper discount.

"Cash differential for [Asian] gasoil has been falling but that could incentivize buyers to move cargoes from East to West. With the spring maintenance season, I think gasoil supply could become tight quite quickly, especially if East-West arb picks up. We are already seeing a slight drop in supply for April," another regional gasoil trader said.

The Platts-assessed cash differential for 10 ppm sulfur gasoil cargoes FOB Singapore narrowed 3 cents/b on the day to minus 18 cents/b at the Asian close March 13, rebounding from a three-month low of minus 21 cents/b the day before, S&P Global data showed. The differential was last seen lower at the Asian close Dec. 6 at minus 25 cents/b.

The front-month gasoil EFS -- the spread between Singapore 10 ppm sulfur gasoil swaps and the corresponding ICE low sulfur gasoil futures contract, and an indicator of the arbitrage economics to ship Asian gasoil to the West -- was assessed at minus $46.34/mt, widening $2.14/mt on the day at the Asian close March 13, S&P Global data showed.

"[Diesel] stocks are below average in the US, Amsterdam-Rotterdam-Antwerp and Singapore with no increase expected near term as refiners enter peak maintenance and drone attacks on Russian refining threaten future exports," S&P Global analysts said in a March 12 oil product update.

Jet fuel/kerosene outlook stable

With refiners still prioritizing gasoil production over co-distillate jet fuel/kerosene, industry sources expect the supply of the latter to receive a measure of support, though demand remains lackluster.

"Lack of demand for gasoil and jet fuel/kerosene is still a concern but jet fuel/kerosene looks a little better than gasoil," a regional middle distillate trader said.

"I am very happy to sell my jet fuel/kerosene cargoes. Buyers are coming to me asking for it. Gasoil-wise, it is the other way around."

Looking ahead, the downstream aviation sector could provide an uplift to jet/ fuel/kerosene consumption as regional airlines continue to see a rise in post-pandemic travel demand.

Hong Kong flagship carrier Cathay Pacific Airways swung to a net profit of HK$9.79 billion ($1.3 billion) in 2023, reversing losses of HK$6.62 billion in 2022 and ending three straight years of losses. The airline's jet fuel consumption in 2023 was 28.8 million barrels, doubling from 13.3 million barrels the preceding year, tracking an increase in capacity of 110.1%.

Singapore Airlines, meanwhile, reported a quarterly record revenue of S$5.1 billion ($3.83 billion) for the Q3 of fiscal year ended Dec 31, 2023, as demand for air travel rebounded in China, Hong Kong, Japan and Taiwan. The group said in a statement that this exceeded the $5 billion mark for the first time in its history.

The Platts-assessed front-month April Singapore gasoil swap crack against Dubai crude swaps, narrowed $1.18/b to $19.94/b, a near 11-month low with the crack last seen lower July 19, 2023 at $19.68/b, S&P Global data showed.

Despite the decline, the gasoil swap crack was trading at a $1.37/b premium to the April Singapore jet fuel/kerosene swap crack against Dubai crude swaps. The latter narrowed 86 cents/b on the day to a near 11-month low of $18.57/b. The crack last traded lower on July 19, 2023 at $18.03/b.