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Jet fuel traders eye opening arb from Asia to Europe as economics pick up

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Jet fuel traders eye opening arb from Asia to Europe as economics pick up

London — Jet fuel traders in both Northwest Europe and Asia are eyeing the openingof the east/west arbitrage as fundamentals soften in Singapore amid apersisting backwardation in Europe.

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Flows from Asia into NWE have been limited for much of the year, withfreezing temperatures in Asia boosting demand for dual purpose kerosene forheating in the first quarter, and then an open arb to the US West Coastpulling barrels to that region.

With the US market weakening and temperatures warming, however, barrelsare expected to start heading to Europe once more.

"It's shaping up that [the East/West arbitrage] might feature, we'regetting into the weakest period in Asian jet and [recent] historical highs onthe regrade, so we'll probably see high production and it's not clear thathigh production will find a home in Asia," one European source said.

The regrade indicates the relative strength of jet/kerosene against 10ppm sulfur gasoil. S&P Global Platts assessed the Singapore regrade spread atminus 48 cents/b Friday -- a sharp decline from April's high of plus $1.58/b.

Barrels are unlikely to start heading to Europe immediately however, withAsian traders demonstrating caution.

Market participants in Asia anticipate that for now there will be morecargoes flowing from the Middle East to ports West of Suez, amid theincreasingly viable economics.

"Yes, it is possible for some," said a Singapore-based trader, who notedthat term buyers of Middle East cargoes were better placed to execute theseflows.

"To do the arb, the [Singapore] regrade has to be weaker, otherwise itwill be just the Middle East refiners. Most traders will not be able to dothis now," said a second Singapore-based trader.

A source at a Middle Eastern refiner agreed, though he said that Europeappeared to be the logical destination for these cargoes due to the ongoingweakness in the Far East. "Economics aren't that good yet," he said.

"Not workable for many, and North Asia-UKC arb is still closed," said aNortheast Asian refiner.

--Caroline Knight, caroline.knight@spglobal.com

--Zameer Yusof, zameer.yusof@spglobal.com

--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com