Middle distillate prices on uptrend in Asia amid strong demand, tight supply

Middle distillates prices in Asia are expected to continue strengthening until December amid ongoing robust demand for gasoil and jet fuel, market sources said Wednesday. 

The gasoil market in particular remained on track for a strong fourth quarter as demand continues to outstrip supply. Some traders remained bullish on price expectations through to the end of Q4, particularly for the FOB Singapore ultra-low sulfur diesel grade, while others noted some relief may be on the way as more supply could emerge later in the year. "Regional turnarounds in Japan and Taiwan are about done," one source noted Monday. 

Another trader agreed, adding that refiners may soon maximize gasoil production on the back of attractive margins. 

At the Asian close Tuesday, the FOB Singapore 10 ppm sulfur gasoil crack against front-month cash Dubai crude was up 15 cents/b day on day at $18.69/b, the highest in three years and seven months. The crack was last higher on March 19, 2015 at $19.15/b, S&P Global Platts data showed. 

"The gasoline crack is pretty weak and margins are so-so, which is common for winter," the trader said. Winter is an offpeak period for gasoline after the driving season ends. 

Still, robust demand for gasoil was demonstrated throughout the third week of October as the cash differential for FOB Singapore 10 ppm sulfur gasoil hit consecutive year-to-date highs. 

At the Asian close Tuesday, the cash differential for FOB Singapore ultra-low sulfur diesel was up 5 cents/b on the day at $1.87/b, the highest since Platts moved the benchmark to 10 ppm sulfur gasoil from 500 ppm on January 1. 

In derivatives markets, the front-month November/December Singapore gasoil timespread jumped 19 cents/b from October 15 to be assessed at plus 87 cents/b Tuesday. 

Similar bullish sentiment was also seen further down the curve, with the Q1/Q2 spread rising 6 cents/b week on week to be assessed at 22 cents/b Tuesday, Platts data showed. 

Looking ahead, market participants are still keenly awaiting more clarity on China's gasoil balance, a key factor that could sway regional fundamentals for the distillate. 

"People are speculating about Chinese export numbers for gasoil," a trader said Monday. 

WINTER DEMAND HEATS UP While seeing a slower start to Q4 than its co-distillate, the jet fuel/kerosene market has been on an uptrend since last week as buying appetite from North Asia gains momentum ahead of its winter peak demand period. 

"North Asia is getting cold now ... especially in the north of Japan," an industry source said. 

Japan, the region's largest kerosene buyer during the winter peak season, was heard to have already bought several jet fuel/kerosene cargoes. Trade sources said the lots, in smaller volumes in the range of 5,000-10,000 mt, were heard to have changed hands at premiums of around $2-$2.25/b to Mean of Platts Singapore jet fuel/kerosene assessment, FOB Korea. Price and buyer details for these barge transactions could not be confirmed. December marks the start of Japan's heating demand season, when the severity of winter weather has a direct impact on kerosene consumption as it is used as a heating oil. 

Sources said regional supply could tighten in coming weeks as outflows of the middle distillate, especially from the Northern Hemisphere, could be limited as supplier countries focused on stockbuilding. Other industry sources noted that regional demand was being further propelled by requirements for gasoil blending, helping to soak up the length previously seen in the market. 

The physical regrade, which measures the price jet fuel commands over 10 ppm sulfur gasoil, remained deep in negative territory, widening 13 cents/b on the day to be assessed at minus $1.92/b Tuesday. 

The firmer sentiment saw the FOB Singapore jet fuel/kerosene cash differential surge to plus 22 cent/b to MOPS jet fuel/kerosene assessments Tuesday from a premium of 1 cent/b on October 15. 

On paper, the prompt November/December Singapore jet fuel/kerosene timespread was assessed at 10 cents/b Tuesday, up 29 cents/b from Monday. The timespread flipped to backwardation last Friday after having been in contango since September 13, Platts data showed. 

Reflecting similar bullishness, the Q1/Q2 spread rose 12 cents/b on the day to be assessed at 56 cents/b Tuesday.