Rising blending costs in USGC reshape TA arb outlook and arbitrage opportunities to LATAM, while Asian market competitiveness points to further tightening E/W

The gasoline market in the West remains flat in timespreads, while cracks trade higher due to crude pressure amid bearish demand expectations.

On the Eastern side, however, the situation is more favourable, with a strong upward trend in timespreads consolidating in the near term and a greater increase in cracks, which are at two-month highs.  

As we indicated last week, the physical arbitrage market presents opportunities from the East to LATAM outlets which, combined with refinery shutdowns extending in Asia, continues to push Eastern cracks and timespreads higher and E/W on the rise, threatening to break the $-7/bbl barrier for August and September. 

Asian crack, timespreads and E/W climb to two months high. (Sparta Live Curves)

In addition to the increase in cracks, the main variation of the week is found in US blending costs, where we have seen a prolonged rise in recent weeks that has changed the arbitrage landscape, especially concerning September arrivals.  

Reformate and naphtha, both light and heavy, are leading the increase in blending costs, and the price advantage that the USGC had for deliveries to several LATAM destinations over the past month diminishes for September deliveries, where we can see a much more competitive Europe due to the pressure on American blending costs. 

Rising blending components in USGC are mirroring its exports options. (Sparta Live Curves)

While over the past month the USGC has been the most competitive option for destinations like Brazil, Colombia, and Peru most of the time, the economics for September are now quite favourable for European supply.

This could keep the cost of components in Europe tight, as we have seen recently, and put downward pressure on the TA arb, which has already corrected 1.5 cpg from last week’s highs. 

Europe place itself into most of Atlantic outlets for September arrival. (Sparta Global ARBS – ARBs Comparison)

One of the main insights we see in the comparison of arbitrages to LATAM comes from the Asian market, as we pointed out at the beginning of the commentary.

After the increase in blending costs in the West, mainly those of USGC in the last week, AG presents itself as the best alternative to supply gasoline demand in Brazil for the end of August.  

Its economics have also improved significantly for September due to the drop in freight and blending costs from the East.

This dynamic suggests that the E/W spread is likely to continue narrowing in the coming weeks, as we have seen over the past two weeks. 

AG is the cheapest option into Brazil for late August deliveries, and its economics keep improving for September. (Sparta Global ARBS – ARBs Comparison)

Finally, comparing the different outlets in the East, the current strength of Singapore, which we previously mentioned, is increasing the competitiveness of AG in Asian destinations, where it presents itself as the best alternative for August deliveries.

Particularly relevant is the improvement in its delivery price for Pakistan, where it is already the main option ahead of Singapore. 

AG export options also improve on the East on lower blend cost and freight. (Sparta Global ARBS – ARBs Comparison)

In summary, the main ideas suggested by the current market are that Europe is gaining competitiveness due to the rise in blending components’ pricing in USGC, threatening to push the TA arb down, and that the E/W spread will remain tight due to the competitiveness of AG in the West.  

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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