European arbitrage points towards Canada, Mexico and South America for July, due to the improvement of the TA arb and the increase in freight from USGC.

The week began with the ongoing downward trend affecting the gasoline market on timespreads and the physical market in EU and Asia, despite cracks supported by a weaker crude outlook after OPEC+ extended voluntary cuts.

Meanwhile, time spreads continue to trade lower, with Singapore 92 plunging into contango in the near term and blending components trading lower in both East and West markets.

Time spreads keep falling on EU and SG in the top chart, while cracks showed a slight rebound in both markets due to weaker crude. (Sparta Live Curves)

The slight rebound we saw last week in the TA arbitrage due to the decline in blend costs in Europe has once again turned into a bearish sentiment due to further falls in gas-nap, which has been declining for 15 days since mid-May.

Coupled with the increase in US runs, the outlook for the RBOB arbitrage from Europe suggests it will be difficult for it to open during the summer months.

TA arbs outlook keeps plunging for July and August deliveries. (Sparta Global ARBS – ARBs Comparison)

Big spike on US runs mirrors a potential spike during summer season. (Source: EIA)

Heavy naphtha is also harming RBOB arbitrage, keeping its price stable despite the sharp drop seen in other components such as reformed and light naphtha, and currently assuming a 20% of the optimal RBOB blending according to our blender, it remains one of the main factors that hinder the arrival of shipments from Europe to the US.

Heavy naphtha keeps well supported on the EU market. (Sparta Live Curves)

With a bleak outlook for arbitrage to the US, European blending now targets new markets where it positions itself as the most competitive alternative due to the rise in freight rates from the US, on a lower freight availability during last 3 days that has been reflected in a big spike affecting TC14.

Since the end of last week, Europe is the cheapest source for Mexico for beginning of July Deliveries.

Furthermore, a cargo of CBOB to Canada has a cost advantage of around 5 cents per gallon from ARA compared to the alternative from Houston, the largest differential between the two origins in two months.

Brazil also has its best netback from Europe for July deliveries, something that hasn’t happened since the end of February. For Ecuador, Peru, and Colombia, ARA presents itself as the best alternative for deliveries in the first half of the month as well.

Europe places itself as the best source for several new outlets after freight increases out of the US. (Sparta Global ARBS – ARBs Comparison)

All of these new opportunities to place European barrels in the short term could stimulate the EBOB complex, establishing support for the falling prices of components, which have dropped significantly in recent weeks, especially in the case of reformate and light naphtha.

If Europe’s current competitive advantage for early July deliveries is realized in increased blending activity and new arbitrages from ARA, we expect EBOB spread could also find support, and it might stimulate the recent crack rebound to extend over time, beyond the recent correction of Brent.

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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