Geopolitical premium fuels gasoline flat prices, while arbitrage outlook threatens RBOB complex

Commentary summary

• Gasoline flat prices have risen consistently since the Iranian offensive, reflecting the geopolitical risk premium and impacting markets globally.
• SING 92 timespreads move to backwardation, reflecting a tighter market outlook and supply risk for Q4.
• Arbitrage margins into Mexico keep improving from Singapore, enhancing its competitive position over USGC.
• Rising TA arb and lower freight are bolstering RBOB imports into NYH, while European delivery prices remain cheaper than USGC across LATAM outlets.

All market attention has shifted toward concerns over the conflict in the Middle East following Iran’s attacks on Israel last Tuesday.

The short-term effect has been the biggest rise in crude futures posted in almost two years last week with Brent trading above $80/bbl currently.  

Regarding the gasoline market, the immediate effect of the geopolitical risk premium has been reflected in the flat prices, trading higher in all sessions since the Iranian offensive, just like crude, while keeping cracks stable across different geographies, with moderate increases in the SING 92, as the Asian market could be the most affected by a potential supply shortage in the short term.

Gasoline flat prices have been trading higher after the October 1st attack by Iran on Israeli territory. (Sparta Live Curves)

Despite the fact that the impact on cracks and spreads has not been massive in the Asian region, both have traded higher over the past week, and the timespread curve has shifted from contango to backwardation for the remainder of the year, reflecting a potential lower supply in the short term if refineries in the Middle East are hit.

However, the situation in the gasoline market is far from extreme in the short term.

With new stock increases across all products over the past week, Singapore’s light ends inventories are at a four-week high, helping to mitigate the bullish risk that could threaten prices in the East.

Additionally, the arbitrage comparison shows a significant shift in one of the markets with direct competition between the West and the East.

Arbitrage margins into Rosarito (Mexico) continue to narrow in favour of Singapore over Houston, threatening one of the key outlets for US exports and stimulating Singapore’s exports for November arrivals.

Singapore continues to pressure the American market, increasing its competitiveness in deliveries to Mexico next month. (Sparta Global ARBS – ARBs Comparison)

This is not the only arbitrage that could impact the US balance in the short term, as the prolonged decline in freight and the increase in the TA Arb spread have substantially improved RBOB arbitrage margins from Europe.

While a few weeks ago, the arrival of shipments from Europe posed no bearish risk to the American market, we now see that the economics in the prompt for refiners in NWE are positive, and blenders have improved their margins by 8cpg over the past week, increasing pressure on the US balance if the flow of RBOB barrels during Q4 does indeed tick higher.

The RBOB arbitrage margin from Europe to NYH continues to rise following the freight correction, the increase in TA arbitrage, and the decline in European blending costs. (Sparta Global ARBS – ARBs Comparison)

The increase in the TA Arb has not only improved the outlook for RBOB imports in NYH but has also substantially increased the competitiveness of European barrels in LATAM.

It has been confirmed in recent weeks that the primary alternative currently is importing from Europe, with delivery prices cheaper than from the USGC for Q4.

This suggests a tighter European blending market in the short term, and it will also add pressure on the RBOB complex, which is currently threatened on both the Atlantic and Pacific coasts.

At the same time, the risk of increased barrel arrivals from Europe to NYH towards the end of the year is also rising.

Europe keeps improving its position to supply LATAM outlets, enhancing the economics of the USGC across all major markets. (Sparta Global ARBS – ARBs Comparison)

In conclusion, the geopolitical premium from the Middle East continues to push flat prices higher across all geographies, particularly impacting SING 92.

From an arbitrage perspective, Singapore and Europe are gaining strength in the gasoline trade with competitive delivery options to Mexico, LATAM, and NYH.

Meanwhile, Houston’s arbitrage margins are narrowing across different outlets, and fresh RBOB imports add further pressure during Q4.

This sets the US market up for a challenging outlook in the coming weeks, impacting RBOB spread and crack, while both the EU and Singapore remain supported in the short term on increasing export options.

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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