Strong gasoline or weak naphtha?

20 June 2023 Time to read:  minutes

The European gasoline market has had yet another rebound with prompt demand coming from NYH with an arb that opened on June 7th mainly on the back of a wider gas naphtha. Indeed, the gas nap spread has more than doubled in the last month from $145/MT to $300/MT. 

Front month blending margins are back in positive territory and blending/arb margins for RBOB went all the way up to 12cpg on Monday, but are now coming back down to a still very profitable 7cpg arb margin. 

July arb margins went all the way up to 4cpg, but have since come off and are almost trading at breakeven today.  That being said, Arb margins for refiners remain wide open in July and we should expect that base load of cargoes moving west from the Med and NWE until at least end of July.

But US demand seems to stop at the end of July with negative arb margins in August and September by 3.85 and 5.5cpg respectively. This is mainly on the back of a wider gas nap on the prompt.

The main question remains whether the front month gas/nap strength will roll into July and August, thus opening up the arbs again.

The arbs playground allows us to see that in order for the August arb to open again, we would need a $270/MT gas/nap, or a $30/MT move from current levels. This is totally possible.

Sparta Global ARBs – Pricing Centre

In terms of component demand in ARA, based on open arbs and positive blend margins for RBOB, E5 and E10, the most sought after components should be heavy reformate and C5.

Not surprisingly, reformate prices have rebounded from the end May lows at +$95/MT to the current highs at +$125/MT. On the other hand, C5 premiums have come off from +$45/MT to +$25/MT over the past week.

Is this a buying opportunity or should this be seen as a sign that the market is weaker than expected?

Sparta Live Curves

Looking at the global picture, the persistent weakness in EW continues to push cargoes out of EOS into the Atlantic basin.

On top of the regular supply from Far East to West Coast Mexico, we have recently witness several cargoes moving from AG/Read Sea to USAC. The most recent fixture being the Navigate Gauntlet, loaded in Gizan end June.

The volumes will not have any significant impact on the supply and demand dynamics in the short term, but the accumulation will most probably be felt at the end of q3. Short-term, EW will still be essentially driven by the strength (or lack of it) in Europe.

Another bearish news is the very weak WAF gasoline demand on the back of the announcement by the newly elected President, Mr Tinubu, to cut all gasoline subsidies. This is already having an impact on short term demand, but it will also create a huge uncertainty for traders for the balance of the year.

This weak WAF demand could explain why C5 premiums have come off, but also why EBOB spreads haven’t rallied over the last days despite the wide open arb to NY. At $25/MT backwardation, traders are cautious about being too bullish in a much more uncertain environment.

So the question remains, is the gasoline market bullish or are we just seeing positive blend and arb margins because of the weakness in Naphtha? Is this a pull or a push?

As always, the answer is probably a combination of both. NY is definitely pulling barrels from both Europe and EOS and by the looks of it, the arbs remain open until end of July. On the other hand we see a lack of WAF demand and continuous weakness on the Naphtha market.

Traders should keep an eye on NY stocks and its desire to keep the arb open. As the whole world is looking to NY for a bid, the strength might not last for long. 

All gasoline traders should also focus on the Naphtha dynamics in the near term as it will drive most of the economic incentives when it comes to blending margins.

Sparta Live Curves

We spoke to Jorge Molinero, our Naphtha Commodity Owner and here are his comments on the naphtha market:

  • Weak fundamentals currently in the market: very low petrochemical margins, high inventories and oversupply have pushed Asian and European markets into contango, not only prompt but all the way into Q3. Only Q4 is showing positive spreads but they may also flip to contango, should the situation remain this way.
  • Gas-nap is the determining factor right now. Proof is the premiums traders are ready to pay for heavy qualities. We are seeing premiums over +100 in Asia and +140 in Europe vs OSN qualities.
  • NYH in the spotlight in the market currently, with weak naphthas around the world and strong GAS/NAP spread and RBOB. Arbs opportunities from Europe to NYH could appear with these values, especially for heavy qualities.
  • GAS/NAP vs crack provide a good explanation of the current market. Low flat prices, wide negative crack, negative premiums for OSN. High inventories in Asia filled with Russian product with a 20/30 $/mt discount. GAS/Nap is the demand factor, and the main blend hub is NYH, so that is the place to be.

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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.

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