Rising TA arb signals potential upside as US prepares for summer demand peak, while Europe sees new supportive options in the horizon
The gasoline market has found support following the late arrival of the summer driving season.
Although the demand boost will not be sufficient to return to the previous values from early Q2, the worsening refining margins and extreme weather have resulted in a decrease in runs in the US during the last week and a significant drop in gasoline inventories, particularly in PADD 1, which is expected to continue over the coming weeks.
The current market focus is on the RBOB arbitrage option from Europe to the USA for July and August deliveries.
As we have been pointing out in recent weeks, the arbitrage remains slightly open for blenders for deliveries during the first half of August and wide open for refineries.
During this week, the margin has remained relatively stable, but the different components have shown intense volatility, led by a rising TA arb that could persist in the coming weeks.
After increasing by approximately 2.5 cpg during the past week, we still see upside potential in this indicator as the US prepares to cover the peak summer season demand increase and potential inventory declines in the weeks ahead.
If we add to this the fact that blending costs are rising in Europe and the decline in gas-naphtha appears to be deepening due to improved demand in Northern Europe and the end of steam crackers shutdowns in Asia, the increased demand for naphtha for petrochemicals could lead to more arbitrage opportunities by the end of Q3 and put upward pressure on European naphtha indicators.
In this naphtha market scenario, which has seen negative premiums in physical markets and increased pressure from the US to attract cargoes from abroad, the rising TA arb appears to be the determining factor that will need to increase further to keep the arbitrage open.
On the EBOB complex, the current decline raises the question of whether contango will reach the European market down the curve or remain in the prompt.
Despite persistent downside risk due to weak global blending demand, two new factors suggest that the decline in timespreads may find its end.
Firstly, the incentive for local blending of E5 and E10 for sale in the European window has significantly decreased in recent weeks.
While still present, this correction in blending margins could indicate a market increasingly focused on exports, thus easing local balance pressures.
Additionally, Europe, with a slight cost advantage over the US, emerges as the cheaper alternative for delivering Roc Premium to Pajaritos, Mexico, following increases in the TA arb and higher freight costs from the US to Mexico.
If this arbitrage materialises, it could provide support against the prolonged decline in EBOB spreads and cracks lasting more than a month and a half.
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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