From decline to opportunity: European gasoline markets could find support from declining US inventories and increased East of Suez competitiveness

The European gasoline market continues to decline, especially on timespreads, while the US and Asia could find support after the correction in the second half of August.

However, the position is less clear in cracks, where crude weakness makes the next moves uncertain.

That said, there is a good possibility that the market could finally find some support, particularly in European blending and the EBOB complex.

Accumulated decline in EBOB timespreads since mid-August. (Sparta Live Curves)

The correction in EBOB has intensified since the end of the summer driving season, dragging down other European indicators and shaping our Q4 arbitrage outlook.

The gas-nap spread is trading around $50/mt, below the historical average, and if we go back to the beginning of Q3, the accumulated drop is over $100/mt for the October contract.

At these levels, blending margins for both E5 and E10 in Europe remain negative, limiting local demand for components. The margin for blending and arbitraging RBOB from Europe to US also remains negative, both in spot and down the curve for the rest of the year.

Nevertheless, TA arbs continue to increase–6 cpg in the last two weeks–and the prolonged decline in US inventories since the end of July is the main indicator that could stimulate arbitrage from Europe.

TA arbs keep reflecting the underlying decrease in US gasoline stocks and a weak European market. However, this is still not enough to open the arb, but could improve Q4 economics. (Sparta Live Curves)

Focusing on the RBOB arbitrage options from Europe, US gasoline inventories have declined for six of the last seven weeks, falling below historical average and providing some measure of support to US markets.

This is the main driver behind the increase in the TA arb and the improvement in the economics for blending and arbitrage from Europe.

Although the arbitrage remains closed for pure blenders, since early August, the margin has risen by 7 cpg to the current -4 cpg, as shown in the Sparta platform. Another key factor in this improvement has been freight rates, with a drop of 55 WS for the NWE-NYH route.

Combined with the rise in the TA arb, this has offset the sharp decline in the European gas-nap spread, and the arbitrage now appears marginally open for NWE refiners.

RBOB arbitrage from EU is improving  although freight correction and increasing TA arb is still not enough to open it for blenders. (Sparta Global ARBS – Pricing Centre)

The trend suggests that the margin will continue to rise, especially if we see US inventories, particularly in PADD1, continue to fall sharply.

Our current view is that the end of the correction in Europe could be near, and the rebound in arbitrage from Europe to the US, hinted at by the Q4 balance, is likely to be the main driver supporting the market and signalling the end of the decline in both the EBOB curve and the gas-nap spread.

Total gasoline stocks in the US. (Source: EIA)

The gas-nap spread continues to decline despite being below the historical average. (Sparta Historical Forwards)

Lastly, we also want to highlight the improvement in the competitiveness of the European barrel in East of Suez outlets. Europe has become the cheapest option for multiple destinations such as Kenya, Indonesia, Singapore and Australia.

This is a clear indicator that European blending is currently experiencing a downturn, and its rebound might not be far off, given that European economics are now clearly the most competitive both in the East and West.

This could potentially incentivise greater local blending demand in the short term.

After summer correction, Europe is now the cheapest option into many Eastern outlets. (Sparta Global ARBS – ARBs Comparison)

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.

Sparta is a live, market intelligence and forecasting platform that enables oil traders, refiners, banks, hedge funds and wholesalers to have access to real-time and global actionable insights to capture market opportunities before others.

To find out how Sparta can allow you to make smarter trading decisions, faster, contact us for a demonstration at sales@spartacommodites.com