Knock-on effects of a diesel export ban

Deep Dive Summary:

• RBOB: Implications of a potential US diesel export ban bullish RBOB longer term, though front spreads look set to weaken as open arbs from Europe lift import volumes.
• EBOB: Bullish EBOB Oct/Nov spread. Bullish Oct Gas-Nap.
• SING92: Bullish SING92 Nov crack.

RBOB:

Changes within the gasoline market continue to be somewhat driven by external forces, particularly in the US market, where rumours are circulating that diesel exports could be banned for 90 days, though the White House has denied this. RBOB prices gained on the news. RB/WTI cracks surged 7% on the rumours to over $59/bbl for September swaps. This is in effect due to the refinery utilisation rates that would result from such a diesel export ban.

(US diesel inventories will build dramatically, forcing supply rationalisation)

The net balance of US diesel for winter consumption, assuming a fully implemented 90-day ban, will severely hinder refinery margins in the US and prompt utilisation rates to decline.

This will create support for increasing US RBOB prices (and downstream retail prices), given that diesel’s net balance would be a persistent build when imports and production are taken against demand. Carry and rationalisation would closely follow.

(European exporters have strong margins into NYH for early October delivery windows)

The threat of a loss of gasoline supply has prompted the September TA arb to increase to incentivise supply into New York on the threat of lost supply from current utilisation rates.

The October TA arb has also gained, though not yet to the point where arbs open. This has likewise spread into the underlying components complex, with heavy naphtha arbs into New York for mid-October delivery reopening as the RBOB/Nap spread gains.

This sets an outlook for weakening blend costs, with prospective losses in supply to be made up through increasing import volumes from European exporters loading in the next two weeks, should the ban be implemented.

(GC CBOB / RBOB Oct spread and prompt cycles have gained on RB weakness)

With weakness in RBOB caused by the increase in mid-October deliveries into New York, GC CBOB Oct diffs have risen despite declines in PADD 1 inventories.

Furthermore, declines in refinery utilisation driven by an inventory-building diesel picture would likewise allow for strengthening GC CBOB pricing as refiners in PADD 3 enter maintenance periods on lowered crack margins, again threatening refinery utilisation and production.

This would prompt a weakening in Oct/Nov RBOB spreads. In addition to the speculative nature of a diesel export ban implementation, there is fundamental reason to support being less bullish on GC CBOB/RBOB swaps and cycles.

(Houston origin cargoes for late October delivery windows are unattractive)

Landed values for Houston exporters within Central and North America continue to look unattractive as blend costs remain extremely high in Houston and backwardation remains a persistent challenge.

Gains made in TA arb pricing have allowed ARA exporters to gain further ground into the wider region by becoming the cheapest landed value in Guatemala and narrowing the gap considerably into Montreal, Canada, while Houston-origin cargoes carry the most expensive landed premiums into Latin America delivery windows.

This suggests that the export window from the USGC is set to decline, weighing on GC CBOB pricing, which has strengthened but just sold off on the diesel export ban rumours.

Granted, one of the potential impacts the market would have to face in the USGC, should a 90-day diesel export ban be implemented, would be a decline in regional freight rates. However, the market would have to contend with increasingly unattractive backwardation as refiners go offline.

This natural increase in backwardation does then begin to prompt the thought of a gasoline export ban in tandem, particularly considering the impact high gasoline prices can have on the electorate. That said, this remains a speculative point at present.

Fundamentally, the low-stock environment the market occupies, alongside Europe’s increasing attractiveness and tight inventory levels, leads me to temporarily de-risk from having too firm a stance on US-linked contracts for the very short term.

EBOB:

EBOB flat prices and spreads followed RBOB’s gains made as rumours of a diesel export ban reached the market, breaking from the recent rangebound performance seen to start the week.

Crack spreads have continued to gain unimpeded this week as a result of the tight inventory environment for gasoline, increased crude transits through the Strait of Hormuz weakening the crude complex over the weekend, and European barge logistics remaining a challenge for components due to low Rhine water levels.

Within the global arbitrage picture, the gains in the TA arb, providing export margins to European exporters into New York, have likewise added a further boost to an already tight gasoline market. European-origin landed values look globally attractive across the Atlantic Basin.

(ARA landing the most attractive into LATAM)

European-origin cargoes continue to land the most attractively across late October delivery windows into South America at the expense of Houston exporters.

This is despite continued gains in regional freight rates, which have been offset by gains in the TA arb. This keeps the outlook for European gasoline prices bullish.

(AG landed values have taken market share across Africa)

Into Africa, West Africa remains broadly held by European exports, though declines in the e/w and freight have impacted the regions where European-origin cargoes land most attractively.

This has been particularly felt within Southern Africa, where AG exporters are pricing increasingly attractively into Durban. The impacts have likewise been felt in North Africa, into Egypt via Suez delivery, where AG exporters have taken additional market share from European-origin cargoes.

In Ghana and Angola, European-origin cargoes have become less attractive as the Gas-Nap has continued to gain, while AG blend costs have remained flat and the e/w has allowed these cargoes to land more attractively into the region.

However, the risk of limited supply from the AG still lends itself towards a bullish outlook for European exporters, should these shorts be unable to be filled by AG supply.

(Blend costs have dislocated from Gas-Nap in ARA)

E5 blending margins have remained steady, marking at +$1.50/mt for ARA blenders in September as the Gas-Nap has continued to lift. Component values in Europe have remained generally rangebound over the past week, the notable exception being alkylate prices in ARA, which have sold off relative to the rest of the components complex.

With alkylate currently comprising only 1% of the 90 kPa E5 blend, the sell-off has allowed European landed values to price attractively into regions where blenders opt for higher percentages of alkylate, such as CARBOB into Los Angeles. However, the strength of the current backwardation in the market is likely to hinder such long-haul voyages.

As European-origin cargoes continue to land attractively on a global basis while being challenged by tight inventory, challenged internal logistics for components, and demand from new regions into the Americas, I continue to hold my bullish outlook on the EBOB Oct/Nov spread.

Meanwhile, with poor underlying naphtha demand in Europe (the arbitrage has reopened into New York but remains closed into the Far East) and gasoline looking set to remain strong, I hold a bullish outlook on the Oct Gas-Nap spread despite open E5 blend margins.

SING92:

SING92 spreads have weakened over the past week as increased crude flows through the Strait of Hormuz and the renewed use of the East-West pipeline improved the outlook for crude availability in Asia from the week prior.

This has resulted in a weakening e/w spread in the prompt as the Atlantic Basin begins to price in the consequences of a potential diesel export ban. Talks between Washington and Tehran occurred this past week at the United Nations General Assembly, with the sides appearing to remain far apart in their respective demands to reopen the Strait of Hormuz.

The lack of a diplomatic breakthrough between the sides continues to add layers of uncertainty to the gasoline market, with potential for the conflict to disrupt energy infrastructure remaining an ever-present risk to the market.

(Components have remained rangebound)

Despite the market relaxing due to increased flows from Saudi Arabia, gasoline components have failed to see any major deviation from last week’s prices.

CN 92 Oxy 2 has remained unchanged, while there remains significant divergence in rumours of the next round of Chinese export quotas. This keeps the market at a stalemate until more information comes to light.

(Landed values for late October delivery regions in the East of Suez)

Despite the dynamic market share battle caused by the declining e/w spread allowing for increasing attractiveness of AG landed values into Southern Africa, the broader East of Suez picture has remained relatively unchanged.

Singaporean cargoes continue to land the most cheaply into Northern Asia, Southeast Asia, and Oceania. Meanwhile, AG-origin cargoes land the most attractively into the Middle East and into South Central Asia (Pakistan), while remaining the most attractive landed values into East Africa (Kenya and Tanzania).

(Sing92 cracks have continued to gain)

As noted, the underlying availability of crude in higher volumes from over the weekend has failed to yield any material impact on regional crack spreads. Structure remains highly backwardated despite the declines in the E/W allowing East of Suez-linked exporters to begin to land more attractively into the Atlantic Basin.

Further risks to energy infrastructure and logistics in the AG, alongside new risks to global refining capacity emerging by way of a potential US diesel export ban, point towards November SING92 cracks continuing to gain over the near term.

This is particularly the case as components have failed to weaken materially despite improved crude availability, while SING92 blending margins in October remain negative, supporting continued crack gains in Asia.