COMMODITIES 2026: Asian gasoil faces supply pressure; US refinery cuts to boost jet arbitrage

This is part of the COMMODITIES 2026 series, in which our reporters bring to you key themes that will drive commodities markets in 2026.

The Asian gasoil market is bracing for sustained downward pressure in 2026 as robust regional refinery operations coincide with sluggish demand growth, while upcoming refinery closures on the US West Coast are expected to create lucrative arbitrage opportunities for Northeast Asian jet fuel suppliers.

Strong refinery utilization rates across Asia, supported by healthy middle distillate crack spreads that have remained above $20/b since Oct. 1, are likely to generate a significant build in gasoil supply throughout the region.

At the 0830 GMT Dec. 15 Asian close, Platts assessed the FOB Singapore 10 ppm sulfur gasoil cargo crack spread against front-month cash Dubai, which measures the relative strength of the product to the crude it is refined from, 70 cents/b lower day over day at $20.35/b.

The Platts-assessed FOB Singapore jet fuel/kerosene cargo crack narrowed 67 cents/b day over day to $22.40/b on Dec. 15.

The International Energy Agency has raised its forecast for global refinery runs in 2026 to 84.4 million b/d, from a previously expected 84.1 million b/d, due to the "resurgent share of diesel and jet fuel within demand growth, the healthy margin environment and growing crude surplus," it said Dec. 11.

Across the barrel, the global oil market is lurching towards a "superglut", according to global commodities trader Trafigura, as new projects come online among producers after years in the making.

Meanwhile, surplus gasoil barrels are likely to remain trapped within Asia. East-West arbitrage economics have worsened amid an overhang of gasoil supply in Europe, pressured by inflows from the Middle East and the US Gulf Coast.

"Supply in the West is looking heavy. USGC build will open arbitrage from the US into ARA," said a regional gasoil trader.

US ultra-low sulfur diesel production rose 356,000 b/d to 5.228 million b/d in the week ended Dec. 5, reaching the highest level since the week ended Dec. 7, 2018, according to Energy Information Administration data released Dec. 10.

Platts assessed the front-month January gasoil exchange of futures for swaps -- the spread between Singapore 10 ppm sulfur gasoil swaps and the corresponding ICE low sulfur gasoil futures contract – at minus $25.05/mt on Dec. 15, narrowing $3.71/mt day over day.

The gasoil EFS spread is closely watched by market participants as an indicator of East-West arbitrage economics, and a less negative spread points toward arbitrage becoming less economically lucrative.

On the demand front, the outlook for gasoil consumption growth remains dim, driven by electrification and LNG substitution trends in China, the largest market in the region, a Singapore-based gasoil trader said.

"In October, LNG continued to hold a clear cost advantage over diesel, with the price ratio rising to 66% from 63% in September, supporting strong LNG heavy-truck sales that surged nearly 150% year-over-year in September. At the same time, new-energy heavy truck sales remained robust, pushing alternative-fuel truck penetration to 45% in September," S&P Global Energy analysts said in the latest outlook report.

Volatility in the Asian gasoil complex is expected to persist due to EU sanctions on Russian-derived products starting in January. While ongoing peace talks between Russia and Ukraine have already dampened market sentiment, participants doubt a near-term easing of sanctions.

"Sanctions will likely take some time to get lifted should a peace deal occur," said another Singapore-based gasoil trade source.

USWC to strengthen pull on Asian jet fuel

Meanwhile, the jet fuel market presents a contrasting opportunity, particularly for Northeast Asian suppliers targeting the US West Coast amid a slate of refinery closures in California.

Phillips 66 said in an Oct. 1 statement that its 138,700 b/d Los Angeles, California, refinery received its final crude shipment on Sept. 30, as it prepares to shut the refinery for good. Valero Energy's Benicia, California, 145,000 b/d plant remains slated to close in April 2026 despite California's last-ditch efforts to reach an agreement with the company to keep it operational.

The two closures will reduce the state's 1.62 million b/d refining capacity by almost 18%.

Against this backdrop, South Korea has emerged as a particularly attractive supplier, according to traders.

"[South] Korea has been and will continue to be a key source for jet due to its location, high jet exports, and Free Trade Agreement with the US," said a South Korea-based trader. "The pull from the US West Coast will naturally increase," he added.

South Korea's oil product exports to the US outperformed so far this year, with January-October oil product exports to the North American market rising 14.4% year over year to 46.86 million barrels, according to data from state-run Korea National Oil Corp.

Earlier in October, the arbitrage window widened following a fire at Chevron's El Segundo refinery, sparking a surge in imports amid climbing prices on the West Coast.

"Over the long run, arbitrage will be open, as the US West Coast is short of jet," said a Singapore-based middle distillates trader, adding that importing Chinese barrels would be unlikely for West Coast market players.

"After inventory draws, [the US West Coast] will still need to buy from Asia," the trader added.