Gasoline markets pinning hopes on late-summer disruptions, but Atlantic Basin in particular facing significant headwinds

Against the backdrop of significant macro turmoil, gasoline markets in both the Atlantic Basin and Singapore have remained comparatively unscathed, with prompt EBOB cracks and spreads seeing weakening, but remaining defiantly placed above seasonal average levels.

The same can be said for Sing92 cracks, but the picture going forward for each side of the Suez is looking decidedly different. 

EBOB cracks remain above their seasonal average levels, but bearish pressure is mounting. (Sparta Live Curves)

Starting in the West of Suez, it is becoming abundantly clear that the EBOB complex needs to cool off, but also that physical component premiums are too strong.

The first stage of this – a narrowing mogas-nap spread as the incentive to blend has fallen – has already taken place, but that in turn does harm TA arb econs and is a further bearish pressure on the European physical market which will be bringing component premiums down in due course.  

EBOB Blend margins are firmly shut on narrower gas-nap spreads. (Sparta Global ARBS – Pricing Centre)

With such bearish signals into the physical EBOB market, and with European TA season still a little way off, it is perhaps surprising that the Sep/Oct EBOB spread remains around $43/mt at the time of writing.

Of that spread, we’d say ~$25-30 is the blend cost difference.

This means there is still a robust backwardation in European gasoline despite the lack of opportunities to export or even blend economically into the EBOB pool, raising the spectre of further contraction in spread in particular as we move through August.  

Widening TA Arb has had narrower European gas-nap to thank, and is finally positive on a net-RVO basis. (Sparta Live Curves)

If we add to the bearish European picture US crude intake falling in recent readings, PADD-3 exports still high, and PADD-1 inventories essentially tracking year-ago levels only due to an uptick in imports recently, there has been a solid argument to see the TA Arb widen recently.

The marked widening we have seen over the last few days, however, appears to have been largely driven by the narrowing European mogas-nap, and has actually done very little to change the underlying economics of moving products from Europe to the US.  

 Prompt opportunities to move RBOB from the AG to PADD-1 have opened according to our Pricing Centre view. (Sparta Global ARBS – Pricing Centre)

Instead, what the widening of this paper spread has done is to open up prompt opportunities to blend and ship RBOB from the AG to the USAC through August.

This opportunity has been pushed over the line to economic levels thanks to a sharp drop in prompt LR freight rates out of the AG in recent days, but a small widening of the E/W and the uptick in the TA Arb have combined to move an Arb which was shut by ~5cpg just a week ago into solidly workable territory even when looking to move cargos via the Cape of Good Hope.  

The USGC remains the origin-of-choice for the Atlantic Basin, but Singapore is threatening ARA exports into WAF. (Sparta Global ARBS – ARBs Comparison)

The RBOB market is not the only one under threat from competition out of the EoS. The arb into Nigeria, the baseline for ARA gasoline exports, is facing stiff competition from barrels blended and shipped out of Singapore.

Whilst this particular arb may not become reality due to better netbacks for Singapore-origin barrels in the short-term, it serves as further indication that there is significant competition into the Atlantic Basin currently, and available margins on placing barrels into anywhere in the region at the moment will be coming under pressure.  

A combination of falling component premiums and a collapse in LR rates has opened Sing export opportunities. (Sparta Live Curves)

The Singapore market has been able to increase its competitiveness due to both falling component premiums and the aforementioned slump in EoS LR freight rates.

Both of these factors point to weak prompt end-user demand for clean products in the East, and as such whilst Sing 92 cracks and spreads which remain relatively well supported for now are set to come under pressure going forward.

The ability to place barrels further afield will remain crucial, but that does mean that the bearish pressure we expect to build up and show itself on the EBOB complex will most likely be mirrored by the Sing gasoline market in due course.  

Philip Jones-Lux is Commodity Owner for Sparta. Having worked with organisations such as JBC Energy and RP Global, Philip is a seasoned energy market analyst with expertise across the oil barrel and power markets

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