Asia’s Middle Distillate Cracks Surge Amid Mideast Conflict Escalation
Asia’s October crack values to Dubai crude prices for middle distillates surged on Friday to levels last seen in late March, after recent escalations in the Middle East conflict threatened to further disrupt shipping in the Strait of Hormuz and Bab al-Mandeb strait, sources said on Monday.
Jet fuel and gasoil crack values jumped to $85.15/bbl and $83.37/bbl, respectively, on Friday, sharply higher from $69.37/bbl and $72.26/bbl, respectively, on Thursday, according to OPIS data.
These values softened slightly to around $81.09/bbl and $82.88/bbl on Monday morning, according to data provided by a broker.
The last time both crack values broke the $80/bbl level was on March 30 when front-month jet fuel and gasoil crack values stood at $94.69/bbl and $86.60/bbl, respectively.
In addition to recent shipping disruptions in the Middle East, sources said that high prices ex-Asia and tight supply globally could have contributed to the spike in crack values.
In the U.S., diesel prices rose to a record high on Thursday, while domestic diesel inventories were around 13% lower than the seasonal average, according to the Energy Information Administration.
Russia extended diesel exports restrictions till the end of September due to Ukrainian drone attacks on its refining industry and there was no assurance that the restrictions will be lifted for October onwards.
There are speculations that exports within Asia may tighten up too. Key exporter China has loosened export restrictions since July, but some market participants reckon that the upcoming third batch of export quotas allocated to state-owned Chinese refiners may be lower than than last year. This will lead to lower exports of refined oil products, including jet fuel and gasoil, for October to December, an analyst said.
Asian prices therefore have to rise sharply against European prices in order to be competitive and to turn arbitrages back to the East from the West, especially for exports from the West Coast of India, another analyst said.
The East-West Exchange of Futures for Swaps values for gasoil have been in deep discounts of $150-200/mt — deeply in favor of Europe — since Sept. 1, but rose sharply to discounts of $147.19/mt and $116.45/mt on Thursday and Friday, respectively, according to OPIS data.
The East-West spreads for jet fuel were more volatile, softening to a discount around $190/mt on Sept. 2 before trending upwards to a discount of around $42/mt on Friday, according to data provided by a broker.
The front-month regrade value — the difference between jet fuel and gasoil swap prices — surged to a premium of $1.78/bbl in favor of jet fuel on Friday, from a discount of $2.89/bbl in favor of gasoil on Thursday, but reverted to a discount of $2.50/bbl on Monday morning, according to data from OPIS and a broker.
The volatility is likely to be mostly driven by sentiments rather than be rooted in any fundamentals. Asian refineries have been producing as much gasoil as they can at the expense of jet fuel, due to better profitability for the former. This has led to bullish sentiments for the latter if any production disruption is to occur, but fundamentals are still looking tighter for gasoil as stockpiling activities in preparation for the winter season should be commencing soon, the first analyst explained.
—Reporting by Kite Chong, kite.chong@dowjones.con; Editing by Mei-Hwen Wong, mei-hwen.wong@dowjones.com