WAF remains one of few outlets for Europe, while competitive EoS market and poor E10 blend margins suggest further weakness for ARA

The Atlantic Basin continues to come under pressure from the increasing competitiveness of barrels from the AG and the upward trend of inventories in the US.

After the threat of a recovery during the last days of last week, we have seen new global declines in cracks and spreads across different markets.

Current market levels suggest at face value a quiet summer season on the gasoline side, despite the threat that the hurricane season and seasonal inventory draws during the peak summer driving season could bring some upside potential.

The outlook has changed during recent weeks in part due to steady inventory builds in PADD 1.

This is also reflected in the significant liquidation of bullish positions by institutional investors, and the RBOB and EBOB complexes shifting to a less backwardated market.

RBOB and EBOB cracks and spread receded again after last week’s gains. (Sparta Live Curves)

Nevertheless, an inventory peak could come soon, as the recent upward trend have leveraged on T/A working in the past for 2H April deliveries and profitable refinery margins, allowing them to operate at higher rates than in previous years.

Weaker refining margins are the talk of the market, potentially impacting runs and therefore gasoline supply just as the summer driving season is getting underway.

A look at the US numbers does not suggest run cuts, though the anaemic international crude market may do so for ex-US runs.

Gasoline stocks have increased during the last month but lower margins and summer driving season suggests no upside potential. (Source: EIA)

Last week, we highlighted the significant decrease in AG blending components, which increased their competitiveness in the Atlantic basin.

This was mainly driven by a notable drop in alkylate and reformate premiums, meaning more than 50% of a potential RBOB blend.

The E/W has climbed due to the threat of oversupply in the Western market and with the uptrend in the freight from AG to West this has prevented the prompt arb from opening during last week.

However, exports from the AG continue to show very competitive values down the curve for deliveries in late June and July, which could contribute to further downward pressure on the Atlantic Basin in the medium term.

RBOB arb from AG to NYH keeps showing a delivery cost very close to ex-ARA despite E/W and freight corrections. (Sparta Global ARBS – ARBs Comparison)

Gasoline components. Weaker reformate and alkylate lower physical prices keep stimulating AG blending economics. (Sparta Live Curves)

On the European side, E10 blending margins have opened for pure blender players and refiners for end-of-May blending, but lower gas-nap has weakened blend econs for June onwards.

However, despite a stronger naphtha crack and increasing backwardation, a significant decrease in naphtha physical premiums on the European side, reaching negative values for OSN in ARA due to a weaker petrochemical outlook, could point to a wider gas-nap in the coming weeks, stimulating E10 blending and improving T/A arbs economics.

Further increases of RBOB vs EBOB would be needed to stimulate the T/A physical arb since a $40/mt correction on gas-nap won’t be enough to open it for June deliveries.

T/A arbs remain closed for June/July deliveries despite naphtha’s recent physical weakness. (Sparta Global ARBS – ARBs Comparison)

E10 blends remains open for the end of May for refiners and blenders on lower gas-nap. (Sparta Global ARBS – Pricing Centre)

Gas-nap plunged below the last two years’ seasonality levels as physical naphtha prices face a weaker local petrochemical demand outlook. (Sparta Historical Forwards)

This downward trend in gas-nap has helped Europe regain the economic advantage as an exporter to Nigeria in the short term.

After the AG started the week as the cheapest option into WAF on an LR basis, European MRs have now positioned themselves as the most price-advantageous source in the prompt.

Nevertheless, deliveries from end of July onwards show AG as the most favourable source, which could add more pressure to the Western side.

Despite EU arb pointing to WAF again, lower gas-nap levels, the pressure from the East and T/A arb closed, together with the lack of new options to LATAM, suggest Europe components could keep coming off in the coming weeks to at least improve E10 blending margin on the region or try to fight for more outlets abroad.

Europe recover price advantage for deliveries into WAF on lower gas-nap. (Sparta Global ARBS – ARBs Comparison)

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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