Refined Products Weekly: China’s 4% export VAT to support Singapore ULSD cracks

Light Ends:

• Bearish near-term sentiment for East of Suez naphtha cracks as waning cracking demand persists. Outlook improves from mid-December as demand strengthens on the back of cracker ramp-ups.
• In the West of Suez, we are moderately bearish in the short term as blending and cracking demand support cracks, but the E/W spread will widen from December due to softening Atlantic Basin fundamentals.
• Key Trade Insight: Favor short positions in Asian naphtha markets in the near term while monitoring signs of recovery from mid-December. Long opportunities in E/W spreads could emerge next month.

Gasoline:

• Sentiment to shift quickly on US gasoline: Expect lengthening balances and pressure on cracks post-Thanksgiving.
• Bearish on European cracks: While export demand has improved this month, Atlantic Basin length will keep weighing down the regional market.
• Moderately bullish on Singapore cracks through Q4: Wider regional tightness continues to support.

Middle Distillates:

• Bullish Singapore ULSD cracks: VAT changes in China are set to drive cracks higher, justifying increased runs from South Korean refiners.
• Atlantic Basin tightness to persist: NWE spot markets remain backwardated as imports drop and cold weather adds upward pressure.
• East/West spread support: Expect East/West swaps to stabilize around $20/t as NWE and Singapore premiums align.

Residue:

• In the East of Suez, steady to bearish for HSFO in the EoS as supplies grow, while for VLSFO the outlook is neutral on firm supply-demand dynamics.
• A similarly weaker outlook for HSFO in the West of Suez amid widening supply replenishments althought in the US the downside will be limited by ending refinery turnarounds and low inventories.