Arb opportunities from the East push E/W higher, while Western options remain limited, and balances suggest further drops

 The gasoline market remains calm in the West as we approach August, with timespreads trading quite flat and a slight uptick in cracks driven more by the declines in crude than by gasoline market activity. 

Volatility is higher in the East, where the prompt market is at the highest levels of the last month in both crack and timespreads, despite the declines down the curve, as we can see with the new feature for forward curve comparison.  

Asian crack climbs in the prompt, while back of the curve corrects downwards. (Sparta Historical Forwards)

After the increase in TC2 and raising blending cost in the west, LATAM outlets are already pointing to Singapore as a supplier for end-of-summer deliveries, stimulating the Asian market in the short term.

According to our arbitrage comparison tool, Singapore remains the cheapest option for Pajaritos and shows very competitive values for Peru and Ecuador for next month’s deliveries.

Therefore, the outlook for the E/W remains bullish on a Western market with few arbitrage options.  

E/W narrowing on rising options for Singapore exports. (Sparta Live Curves)

Singapore delivery price into LATAM improves on higher E/W and lower freight. (Sparta Global ARBS – ARBs Comparison)

The RBOB arbitrage from Europe has remained closed since the beginning of July, and currently, the margin is negative for both blenders and refiners in ARA and NWE.

Despite the uptick in the TA arb, the incentive is still absent, and the rise in freight rates, which have increased by another 20 WS points in the last ten days for an MR from Rotterdam to NYH, keeps the options well closed for the end of Q3 and the beginning of Q4.  

RBOB arb margin keeps closed for blenders and refiners, showing no options for the coming months. (Sparta Global ARBS – Pricing Centre)

US balances do not suggest the need to open the arbitrage in the short term, as global gasoline stocks keep climbing and they are currently far above last two years seasonal levels.

Focusing on PADD1, despite lower values, the peak of the summer driving season is already behind us, and Europe must look to alternative outlets as US imports points to be lower than seasonal average. 

US gasoline stocks back to average, well above last two years seasonal values. (Source: EIA)

The European market has not only lost the option to export to the US but also its options to LATAM have diminished in favour of cheaper alternative from the USGC.

The rise in blending costs, hampered by a gradual decline in gas-naphtha, has hurt these arbitrage options and the margin of blending and selling in the local market window.

In the latest JODI update, we see one of the main reasons for the decline in gas-naphtha.

Petrochemical demand for naphtha has exceeded early-year expectations, leading to an accumulated correction of more than $100/mt in the gas-naphtha spread to date, with few signs on the horizon indicating a reversal of the trend. 

Naphtha demand outperforming the expectation during 2024, petrochemical demand has driven a huge correction on gas-nap values. (Source: JODI)

Gas-nap correction for August values. (Sparta Live Curves)

The T/A arb is trading up but only driven by the rise in RVO, so given the lack of outlets for the next two months, we see the possibility of further declines in the West, especially in the EBOB complex.

Observing seasonal values for a historical comparison, despite the recent correction accumulated since May, cracks remain at historic highs if we consider the last two years as outliers due to COVID, so there is room to further drops in the coming weeks.  

Source: Historical Forwards. Gasoline cracks remain at historical highs in the West, considering last two years as outliers. (Sparta Live Curves)

Jorge Molinero is a Commodity Owner at Sparta. Starting his career as a financial analyst with BBVA, Jorge quickly transitioned to market intelligence within the energy sector, spending 4 years as a naphtha analyst with Repsol before joining Sparta in early 2023.

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