Singapore physical 10 ppm gasoil crack hits record low on supply influx, demand headwinds

Singapore — The Singapore physical 10 ppm sulfur gasoil crack to front-month cash Dubai hit a record low on the back of a supply glut and weak regional demand, with the outlook likely to remain dim in the months ahead as high inventories continue to cap any upside, traders said.

At the 0830 GMT close Sept. 3, the benchmark Asian ultra low sulfur diesel physical crack to front-month cash Dubai slipped 64 cents/b day on day to hit a record low at $2.70/b, S&P Global Platts data showed.

The weakening to sub $2/b levels brings the physical gasoil crack to levels comparable with fellow transportation fuel gasoline. Industry sources said the weakening of gasoil cracks is significant as the middle distillate has so far enjoyed much stronger product crack spreads to crude compared with gasoline, due to its relative resilience during the course of the pandemic. At the Asian close Sept. 3, the physical 92 RON gasoline crack against front-month cash Dubai was assessed down 3 cents/b at $2.20/b.

The current all-time low surpasses the previous record registered during the height of the coronavirus pandemic earlier this year, when the physical gasoil crack to front-month cash Dubai drifted down to $3.13/b on May 15.

Asian middle distillate traders said they expect sentiment for the gasoil market to remain bearish as the coronavirus pandemic continues to cause uncertainty across the region, which has siphoned demand away from crucial sectors like transportation as more people adopt home-working measures.

"The situation that we are seeing now [for gasoil] in Asia is more of a demand impact," a senior trader with a refiner said.

"Regional demand is coming off as there are still a majority of people working at home and it is not supporting transportation fuel ... I think that people's confidence must be there before demand can pick up," the trader said.

The situation has been further exacerbated by incremental supplies of gasoil flowing into the Asian spot market, not only from regional refiners, but also from India and the Persian Gulf due to a wide Exchange of Futures for Swaps, or EFS, spread.

The EFS is the spread between front-month 10 ppm sulfur gasoil Singapore swaps and the corresponding ICE low sulfur gasoil futures, and is a measure of the relative strength between the Asian and European gasoil markets.

Industry sources have said that an even weaker gasoil demand situation in the West has widened the EFS spread into positive terrain since Aug. 28. This means that gasoil can command a higher price in Asia than in the West, with the result that supply barrels from India and the Persian Gulf will be directed into Asia. At 0300 GMT Sept. 4, the September EFS intraday value was seen at plus $5.75/mt, significantly wider than the plus $3.10/mt assessed at the 0830 GMT close Sept. 3.

"Cash [market for gasoil] is very weak," a senior trader with a European trader said, adding that "more arb cargoes are coming East."

The supply influx was demonstrated by a sharp jump in commercial middle distillate stockpiles in Singapore, with latest data released by Enterprise Singapore late on Sept. 3 showing that jet fuel and gasoil stocks in Singapore soared 11.57% on the week to hit a nine-year high at 16.02 million barrels for the week ended Sept. 2.

The rise was led by a near doubling of gasoil inflows, which flipped the city-state to being a net gasoil importer for the first time since the week ended April 15. Gasoil imports surged 98.8% on the week at 466,362 mt in the week ended Sept. 2, with China the biggest supplier at 128,874 mt, followed by India at 107,255 mt, and Malaysia at 92,363 mt, Enterprise Singapore data showed. Also of note were volumes from Qatar and Saudi Arabia, at a combined 56,707 mt.

In an earlier report released in August, S&P Global Platts Analytics had said that globally high inventory levels were likely to exert downward pressure on gasoil cracks.

"Weak demand bloated ... Singapore distillate stocks to above their historical averages," the report said, adding that global diesel/gasoil cracks are expected to remain under pressure till at least the end of September, and tracking the low end of their respective historical ranges.

"With the assumption of normal winter weather this year (compared to last heating season, which was exceptionally warm), distillate cracks might see some support later in the year. However, high inventories will restrain sharp upward swings," Platts Analytics said.