Driving season kickoff? TA improvement and RBOB margin from Europe gain momentum

Prolonged decline in the price of blending components in the European market, due to the lack of export options during much of Q2 has opened new profitable option in the abroad markets.

The correction in reformate, one of the main drivers of RBOB blending as it accounts for about 35% of the current optimal blend, was followed by a strong correction in the physical naphtha market, both in C5 qualities optimal for blending and in OSN.

Market now points to increasing TA arb increasing after several months of the margin closed. 

Blending components under pressure in the European market. (Sparta Live Curves)

RBOB arb from Europe shows new opportunities for beginning of August on lower freight and blend costs. (Sparta Global ARBS – Pricing Centre)

On the demand side, the US market keeps the current trend that started before the driving season, resulting in a sustained increase in both gasoline and diesel inventories.

Currently, in PADD 1, we have observed inventory increases in 6 of the last 7 weeks.

However, the values are still below the historical average, and the expected increase in demand in the coming weeks points to an increase in arbitrage flows from Europe for July and August deliveries. 

PADD 1 Mogas stocks have built on 6 of the last 7 weeks, driven by increasing runs, but they still remain below historical average. (Source: EIA)

The drop in TC2 at the beginning of the week has also contributed to the opening of RBOB arbitrage from Europe to the US, expanding the margin for both blenders and refiners.

Currently the arbitrage is marginally open for blenders for early August deliveries, but much wider for NWE refiners. 

Regarding freight, a correction of 60 WS points at the prompt since the beginning of the month, driven by the drop in TC2 arbs loading out of ARA, has significantly lowered the cost of the route, considerably cheapening the TA arb. Combined with the prolonged decline in European components, this has slightly opened the margin to the US. 

The closed arbitrages from ARA to the US have facilitated this decline, with ballasters from UASC heading to USGC instead of returning to ARA. Given the current values and the improvement in the transatlantic arbitrage outlook, we have likely seen the bottom of this trend.

It may find support in the coming weeks if the new alternatives for European exports materialise. 

TC2 collapses at the prompt, stimulating TA arbs for the coming weeks. (Sparta Live Curves)

Despite increasing TA arb opportunities that could stimulate the European market, there is another sign that points to further declines that could continue marking lows in the spread and revive the decline of the crack: the significant rise in the local EBOB blending margin.  

After a very steep rise since the beginning of June, the incentive to blend in Europe and sell in the local market currently has increased considerably, and the margin is positive for all of June and July.

This could contribute to the oversupply of the European market  and continue to pressure falling timespreads for the summer months, with contango becoming a possible option in the short term. 

E5 blending margin increasing for summer months, threatening an already week EU market. (Sparta Global ARBS – Pricing Centre)

In Asia, bearish pressure continues to impact the gasoline market as well, with the July-August Sing 92 timespread trading flat after the correction earlier in the week and the potential decline into contango, where the market already stands at the prompt. 

On the components side, alkylate has climbed after the sharp declines at the end of May, hurting the arbitrage margin to Singapore, while the remote arbitrage options to the West that we saw last month fade away, pointing to further short-term declines in spreads and cracks in the Asian market. 

Sing 92 margin decreasing for AG deliveries on rising blending costs. (Sparta Global ARBS – Pricing Centre)

Alkylate rises in the AG market, harming blending economics and export opportunities, currently 15% of Sing 92 optimal blend. (Sparta Global ARBS – Pricing Centre)   

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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