Asia middle distillates: Key market indicators for Aug 10-13

Asian middle distillate markets started the Aug. 10-13 trading week on a steady-to-firm note, with dented East-West arbitrage economics and rising COVID-19 infections pushing gasoil market participants to the sidelines.

Meanwhile, firm buying interest amid the relaxation of air travel in Europe and the US is poised to lift the jet fuel complex, but industry sources cautioned the upside could be capped by the highly contagious delta variant.

At 10:37 am Singapore time (0237 GMT), the ICE October Brent crude futures contract was down 5 cents/b (0.07%) to $68.99/b, from $69.04/b at the Aug. 9 close.

Jet fuel/Kerosene

** The balance August-September jet fuel/kerosene market structure flipped into backwardation at plus 1 cent/b at 0830 GMT Aug. 6, widening 11 cents/b day on day, S&P Global Platts data showed. At 0200 GMT Aug. 10, brokers pegged the spread even wider at plus 7 cents/b.

** The FOB Singapore jet fuel/kerosene cash differential flipped into premium territory on Aug. 6 and ended the week at plus 7 cents/b to Mean of Platts Singapore jet fuel/kerosene assessment, rising 11 cents/b day on day, Platts data showed. The cash differential has been in discount territory for 12 weeks and was last seen in premium territory on May 17, 2021, at plus 25 cents/b to MOPS jet fuel/kerosene assessments, Platts data showed.

** While trade sources maintained an upbeat momentum on a demand uplift in the west, rising COVID-19 infections in Asia continue to sap demand for aviation fuels as countries maintain a tight lid on border control. Indonesia, for example, has extended its COVID-19 restrictions on Java and Bali islands until Aug. 16 amid the rampant spread of the deadly viral disease.

** In the latest report by aviation data and analytics company, OAG, on Aug. 9, international capacity remains at less than half 2019 levels and shows no signs of a significant recovery heading into the autumn, while major domestic markets such as China and Australia continue to see capacity cuts as they contend with the latest COVID-19 outbreaks.

** The Q4 2021-Q1 2022 jet fuel/kerosene swap spread, an indication of near-term sentiment, averaged plus 31 cents/b over Aug. 2-6, narrowing 19 cents/b from an average of 50 cents/b the week before.

Gasoil

** The balance August-September gasoil market structure was pegged at plus 3 cents/b at 0200 GMT Aug. 10, widening slightly from the plus 2 cents/b assessed at the 0830 GMT Asian close on Aug. 6, Platts data showed.

** The August Exchange of Futures for Swaps, or EFS, spread was pegged at minus $7.63/mt at 0200 GMT Aug. 10, narrowing from minus $9.11/mt at the Aug. 6 Asian close, Platts data showed.

** The coming week may see the Asian gasoil market rangebound, with traders saying that earlier concerns over a possible rise in gasoil export volumes from China have mostly receded into the background. "The rise in COVID-19 infections in China may not be so relevant to gasoil as any demand impact could be offset by crude run-cuts... so I don't think there will be a lot of [gasoil] exports from China," a Singapore-based gasoil trader said.

** Still, the gasoil complex has encountered fresh headwinds in the form of rising freight rates, which are threatening to close arbitrage lanes to move Asian gasoil barrels to the West. Some market participants said the arbitrage to move Long Range 2 vessels from India and the Persian Gulf to Europe was looking increasingly difficult to work. "The East/West needs to come off a lot more," a regional source said. Even as participants keep a wary eye on the EFS spread, shipping sources said a further rise in LR2 freight rates cannot be ruled out. A possible closure of the arbitrage would deal a fresh blow to the Asian gasoil market, which has been facing a challenging demand period amid prolonged and increasingly tighter restrictions and lockdowns that have fanned out across the region over the past few weeks, with several countries battling a surge in coronavirus infections.

** The Q4 2021-Q1 2022 gasoil swap spread, an indication of near-term sentiment, averaged plus 94 cents/b over Aug. 2-6, narrowing 11 cents/b from an average of plus $1.05/b the week before.