Is this another buy the dip moment?

Gasoline market is experiencing a price correction in both cracks and spreads not seen since mid-April.

At the time the overwhelming majority of market participants considered it as a buy the dip kind of opportunity. Is this time the same? Perhaps it’s a bit early to say, but we do see some fundamental shifts occurring globally that are exacerbating the current weakness momentum.

Lets unpack them:

On the one side the lack of WAF demand following the removal of the local subsidies and the uncertainty generated from the potential cancelation (and the terms of such cancelation) of the DSDP crude-products exchange is hampering demand from one of the two main gasoline outlets for Europe.

On top of that, as we can see from our global arb calculator, should demand pick up it should theoretically come from AG as it lands $14.5/MT cheaper than ARA on equivalent vessel size (LR1) for an end July arrival.

On top of that the naphtha weakness has started to spread into gasoline as blending seems to be the only potential outlet for naphtha barrels, given the lack of petrochemical demand.

The Gas/Nap rally experienced since early may seems to have found a ceiling, or at least a pause. Similarly N+A physical premiums have also experienced a correction over the last days, currently trading at +$125/MT , down from the +$+150/MT seen last week.

The chart below describes how the heavy naphtha barrels managed to find homes into the gasoline pool and compensated the lower Naphtha prices with higher premiums almost on a 1 to 1 basis (+$160/MT increase in Gas/Nap vs. +$105/MT increase in N+A premiums since early May). During this time frame, reformate premiums remained relatively stable until mid-June before the recent spike.

The recent drop in naphtha prices and on gas naphtha is potentially a sign that blenders are saying “no mas”. There needs to be a higher demand pull to justify more naphtha demand in the blends. Until then, naphtha barrels will only add to the Supply balances of gasoline.

The only bright spot of the market over the last month was the record demand from NY. As mentioned in several market reports, forward NY Arbs from Europe have remained shut since the beginning of the year and US buyers had limited term deals in their books.

As supply from the GC dried up, the buying spree had to compensate for the lack of term business. This demand pull attracted many Naphtha barrels as blending values were positive again.

But we start seeing signs of exhaustion and for the moment August and Septembers arbs remain shut. The market is discounting that the record demand cycle is short lived.

Another sign is the fact that low RVP Eurograde cargoes are heading towards ARA. With Naphtha being so cheap, blenders on both sides of the Atlantic are maximising naphtha blends with high octane material.

This is leaving Eurogrades cargoes heading to ARA, adding more pressure on the supply side.

Looking at technical indicators, we witness both spreads and cracks remain within the bullish trend channel that started in Jan 23. Ebob July/August spreads have broken the upper band of the trend channel and should be testing the 100 day MA at $18.25/MT.

On the other hand July cracks remain on the upper band of the trend channel. If it breaks the $20/bbl mark, the next test will be the 50 day MA at $17.75/bbl following by the 100 day MA at 16.25.

Now obviously no one wants to become bearish before the end of the summer and we still need to see how the DSDP situation unfolds, if the NY demand keeps rolling and how the hurricane season plays out.

These unknowns keep the market on the higher end of the past 5 years, aside from last year (see historical forward chart below). The reality is that Aug/Sept spread is currently trading at the 91^st percentile over the past 5 years (see chart below), so given the weakness in Naphtha and closed arbs to all destinations except for NY, there is room on the downside. 

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Felipe Elink Schuurman is CEO and Founder of Sparta. A former trader, Felipe drives strategic vision and growth at Sparta. Before Sparta, Felipe worked and traded for BP, Vertical and Gunvor.

Sparta is a live, pre trade analytics 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