Still open for business: Softer reformate, naphtha keeps Europe-US gasoline arb marginally profitable; Sing blend components could get lifted by Pakistan demand
Gasoline remains relatively rangebound with cracks, spreads and the gasoline-naphtha spread finding support after early May declines.
The main factor behind this support is the opening of new arbitrage opportunities from Europe to the United States, which remains marginally open for European blenders for August deliveries, as we mentioned in last week’s commentary.
Blending components could also find some support after the sharp correction in the last six weeks, where light reformate has dropped more than $50/mt at the prompt.
Demand could be stimulated in the coming weeks if the incentive for blending RBOB and E5 remains open. Europe is also expected to continue as the cheapest alternative for Latam and WAF in the medium term.
After a period of several months with arbs closed and previous indicators pointing to a summer where the US would not need European product, the primary factor improving economics has been the reduction in blending components costs.
Leading this decline are light reformate and naphtha, which have seen significant corrections in the physical market.
However, despite the recent opening of the arbitrage from Europe to the US, the North American supply side continues to suggest that this driving season will not result in a significant need for imports into PADD 1.
With robust refining margins in Q2, US global runs reached 95% just two weeks ago and inventories in the NY area remain well-covered amid a prolonged rise in PADD 1 gasoline stocks since mid-April.
Following the correction in cracks, primarily in gasoline and diesel, margins have adjusted, and it is unlikely that we will see production levels as high as in previous weeks.
However, if the increase in stocks continues and approaches historical averages, the overall correction in the gasoline market and blending components could persist, with RBOB and EBOB timespreads being particularly affected.
In the East, the persistent drop in freight rates from Singapore has changed the outlook for deliveries to Pakistan during the summer months, displacing the Arabian Gulf as the cheapest alternative for an LR1 of gasoline. The arbitrage from Singapore to Saudi Arabia also remains open.
Both flows could result in short-term upward pressure on Singapore’s blending components, stimulating demand and preventing the Sing 92 spread from falling into contango in the coming months.
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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