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European middle distillates cracks hit 2019 highs as crude slips

European middle distillate cracks have climbed to their highest this year amid falling crude prices, a closed arbitrage from Asia and expectations of greater demand as International Maritime Organization 2020 regulations on marine fuels loom.

The front-month 10 ppm diesel FOB ARA barge crack swap rose 38 cents on the day to an eight-month high of $17.40/b Thursday, the highest since November 26, while the front-month 0.1% gasoil FOB ARA barge crack swap also hit an eight-month high, rising 35 cents to $16.30/b, S&P Global Platts data shows.

Jet fuel cracks rose similarly, with the front-month jet FOB FARAG barge crack swap up 41 cents to an eight-month high of $18.06/b.

The main reason behind the rise in middle distillate cracks is the recent fall in crude prices, one trader said.

“What is supporting diesel cracks is crude, it is the slump in crude prices,” he said, adding that as a result refinery margins were good.

Front-month Brent crude futures have shed around $7/b over the past two weeks, from nearly $65/b on July 31 to $57.83/b at the European market close Thursday.

In specific markets, European diesel has drawn support from a closed arbitrage from Asia into Europe, steady demand and a relatively low export program of ultra-low sulfur diesel from Russia via Primorsk, while on top of that the arbitrage from the US has looked less easy to work.

“There is no cheap resupply in ARA, there are fewer vessels coming from the East and the arbitrage form the US is touch and go,” another trader said.

Meanwhile, the 0.1% gasoil market has been boosted by strong demand into North Africa this summer, notably into Egypt and Libya, amid tight supply.

For jet fuel, stronger-than-expected demand for jet fuel in Europe has led to limited prompt availability, and although the tightness has somewhat subsided the European jet market remained strong, according to traders.

According to a third trader, the strength in distillate cracks along with a weakness in fuel oil cracks is also down to the upcoming IMO 2020 marine fuels regulations.

“With fuel oil collapsing people think fuel demand is already being replaced by gasoil.” the trader said, adding: “IMO would be the [possible] cause of the stock draw in the US.”

US distillate stocks fell 1.9 million barrels in the week to August 9, according to the latest US Energy Information Administration data.

Many analysts and traders expect distillate cracks to continue to strengthen with IMO marine demand for diesel/gasoil expected to kick in from around Q4.

GASOLINE WEAKNESS
Bucking the trend for improved refining margins, European gasoline cracks have been slipping over the past two weeks, with the front-month Eurobob gasoline FOB AR crack versus the front-month Brent future shedding 5 cents to be assessed at $8.50/b Thursday, down from $11.75/b on July 31, as limited demand and arbitrage opportunities weigh on the complex.

The weak gasoline cracks, paired with a steep backwardation, could lead to refiners opting to adjust runs and maximize other components.

“You can’t take gasoline into storage, the backwardation is stopping you, refiners could slow down runs or you can switch and max your distillates,” a gasoline trader said.

As a result of this strength in middle distillate cracks, demand for distillate-rich grades is being boosted.

Egina, Nigeria’s newest distillate-rich export grade, is “clearing up,” one trader said Thursday. Traders have noted that the September-loading program is selling well while other Nigerian grades continue to struggle for buying interest.

Azeri Light has also seen differentials soar in the last six weeks, as lighter Mediterranean grades such as Saharan and CPC Blend have lagged. Turkey’s TPAO was heard last week to have sold a September 4-5 Azeri cargo at Dated Brent plus $2.40/b on an FOB Supsa basis, whereas in late June the crude was assessed at Dated plus $1.80/b on a CIF Augusta basis.
Source: Platts

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