Options for RBOB arbitrage have completely disappeared, while a European market with few export alternatives on the horizon points downwards

The US gasoline market continues to show that imports from Europe will not be necessary in the coming months.

Despite the inventory draw we saw last week in PADD 1, the TA arb continues to trade downwards, with EBOB holding up better since the beginning of July than RBOB in the American market, especially in terms of cracks.

The outlook has worsened,   closing the options for blending and arbitraging RBOB from NWE and increasing the competitiveness of barrels from Houston to several outlets in Latam. 

RBOB arbitrage from Europe is well closed for Q3 and Q4 after TA correction and blending cost rebound. (Sparta Global ARBS – Pricing Centre)

Additional to the TA arb correction, the cost of blending in Europe has increased significantly over the past few weeks. Reformate, Raffinate, and C5 have rebounded in Europe since the beginning of June after the significant drop over May and June.

Following this drop and the increase in the TA arb, Europe became the cheapest option for multiple destinations in Latam (especially Brazil, Peru and Colombia) at the beginning of July, apart from the fact that the RBOB arbitrage to NYH opened for 10 days.

This provided a clear incentive for European blending, hence the rebound in component premiumsn.  

However, the outlook is different for the coming weeks with the market pointing to September deliveries in NYH, RBOB arbitrage being closed by 7 cpg, and Houston competing again for exports to Latam.

Therefore, it does not seem to be a significant rebound since blending options in Europe are now limited. 

European blending components increases in Europe after a big downtrend in May and June. (Sparta Live Curves)

In the following chart, we can see the effect that the drop in the TA arb and the increase in blending costs have had on the arbitrage from Europe to Latam over the past few weeks. Using Peru as an example, this dynamic is also noticeable in many other American outlets. 

After ARA positioned itself as the cheapest option at the end of last month, we have seen over the past 10 days how the dynamics have reversed, with Houston reclaiming its position as the cheapest source of supply into the region. Currently, blending costs are as much as 6 cpg lower for arbitrages in August and September.

Houston is now the cheapest source of supply for several destinations in Latam. (Sparta Global ARBS – ARBs Comparison)

 The forward outlook for these arbitrage opportunities also indicates that Houston will remain the primary supplier for the remainder of Q3 and the beginning of Q4. This leaves Europe with few alternatives in the current market and will continue to exert downward pressure on spreads and cracks if this trend persists in the coming weeks. 

The outlook for next month suggests Houston will retain its price advantage. (Sparta Global ARBS – ARBs Comparison)

 However, within the shift we have just described, two options remain where Europe still bests the Gulf: Brazil and Canada, with economics very similar to those in North America.

If these arbitrages remain open and we see significant stock corrections in gasoline inventories in PADD 1 in the coming weeks, we could see a European market that resists declines.

However, it seems more likely that the recent correction won’t be sustained over time and that the limited export options will result in declines on paper. 

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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