The traditional destocking of excess gasoil and jet fuel cargoes in Asia ahead of the new year could hit a roadblock as rising freight rates shut arbitrage lanes to the west of Suez, exerting downward pressure on the market, traders said Wednesday.
This was despite a relatively wide Exchange of Futures for Swaps — the spread between front-month 10 ppm gasoil Singapore swaps and ICE low sulfur gasoil futures — a closely tracked measure of the distillates arbitrage between the two regions.
At 0300 GMT on Wednesday, market participants were valuing the December EFS at minus $19/mt. S&P Global Platts data showed the front-month gasoil was at minus $18.81/mt Tuesday, widening 36 cents/mt day on day.
The spread had recovered in late October after widening to minus $20s/mt levels earlier in the month as supply concerns following the September 14 attacks on Saudi Aramco’s Abqaiq processing facility and the Khurais oilfield raised prices in Northwest Europe.
“It’s simply because of freight,” a trader based in Singapore said, adding that lump-sum freight for a north Asia-UK-Continent voyage has ballooned to $2.5 million at present from $2.2 million in the week ended November 15.
“Hard to do any arb at this point. All [Asian] barrels will be trapped within the region…technically they will flow here [Singapore],” a second industry source said.
Meanwhile, market participants do not see any relief on the supply front as regional refineries were still maintaining current run rates.
When asked if the recent decline in middle distillate margins could prompt north Asian suppliers to cut production, a north Asian supplier said “not for now.”
On that note, shipping fixtures also showed that the bulk of LR2 ships bound for the west were from Middle East and India, where arbitrage economics were still viable.
Shipping sources said at least five LR 2 ships chartered to carry gasoil from Middle East to the UK-Continent and east Africa in coming weeks.
RISING FREIGHTS HINDER JET FLOWS TO WEST
The rising freight costs have also soured east-west jet fuel economics, traders said.
While arbitrage economics to move jet from northeast Asia to the west of Suez were workable earlier in the month, the window of opportunity has since closed.
Vitol fixed the Searunner to load 90,000 mt of jet fuel on November 25 for a Daesan to UK-Continent voyage at a lump sum of around $2.10 million, but later attempts have failed.
For one, BP recently put the Sea Envoy on subjects to load jet/kerosene on a South Korea-UKC voyage at a lump sum of $2.45 million, but later opted not to take the ship.
“The economics don’t work anymore, freight is getting too expensive,” a northeast Asian refiner said about the arbitrage.