Red Sea escalation, phase two: gasoil

As if the East-West pipeline attack from last week did not bring about enough bullishness to oil markets the rumored cancelations of Saudi crude loadings for European refiners are adding further fuel to the fire for distillates with increasing supply risk in the Red Sea.

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Indeed, as we discussed yesterday, today’s events skew the scale closer to the Escalation scenario, with diesel markets also experiencing some strong prompt support at the time of writing. In short, if things head south, our educated guess is that European refinery runs will come off from current projections by about 200kbd or remain at risk, prompt bullishness for gasoil will remain in place, with the Med particularly exposed to a supply squeeze, from the imminent drop in gasoil barrels from the Middle East. Asia too, will see its fair share of bullishness, with security of feedstock supply likely to weigh on opportunistic gasoil exports, seen lately.

The rumored cancelled loadings of crude cargoes will directly impact slate optimization – with medium sours preferred to maximize distillates production - and potentially crude availability with over 800kbd of crude exported from the Red Sea and Sidi Kerir going to European and Mediterranean refiners. A briefly rumored and unsubstantiated attack on the YASREF refinery at Yanbu – a major diesel exporter with almost all of its around 220kbd of diesel exports arriving in Europe and the Med in 2025 – added to the skittishness around prompt markets already dealing with a Russian diesel export ban and the crisis in the Strait of Hormuz. However, materially, outflows of gasoil/diesel from Yanbu refineries are already down nearly 50% y/y, with Jizan’s outage in July following a Houthi attack and Red Sea refineries have to make up more of its shortfall that served the domestic market.

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The events of the last days in the Red Sea are certainly bullish for diesel, a market that continues to test new heights in terms of cracks as the global pinch point remains refining capacity to satisfy diesel demand. The escalation of the conflict in the Red Sea risks greater aversion of passing through the Bab El-Mandeb Strait, creating an immediate gap in cargo arrivals from India and exacerbating the supply disruptions in the Mediterranean in particular. The prompt market is at risk of suddenly becoming very short should vessels start to take the longer way round the Cape of Good Hope to Europe and the Mediterranean.

For Asia, the damage to the East/West pipeline is perhaps more immediate in terms of sentiment as it adds to the anxiety around feedstock supply, which risks more restrained regional refinery runs and crimped distillates exports tightening the global market. It casts doubt on whether China’s more permissive attitude to exports in recent months will be sustained. Greater flow out of China has eased market fundamentals and even allowed for exports to Europe of diesel, enabling a wider East/West spread. Worries around feedstock will reverse that trend and risk of less diesel exports in October should strengthen the Singapore swaps market too.

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