Singapore likely to start pricing up again

Commentary summary:

• Gas E/W likely soon a buy once Sing starts to price into Eastern shorts

• EBOB looks a little bearish on the current arb/price setup but Iran news can easily shift the equation.

• TA Arb might look a little toppy but not particularly clear with US stocks also starting to draw quickly and TC14 bearish.

Cycles of risk-on and risk-off in the headlines are also surely impacting EBOB spreads as well as crude and other fuels, though May/Jun EBOB is still $20+/mt higher y-o-y and can hardly be called relaxed. May EBOB cracks are approaching Ukraine invasion levels but June and Q3 cracks still lag Ukraine levels by a good $20/bbl.

A key theme I’ve been hearing from contacts is whether being long deferred gasoline cracks (and distillate, fuel oil cracks) are still looking like a trade. This depends at the basic level – and to be treated separately every month – on whether supply loss outpaces demand loss, assuming SoH remains a big problem.

We don’t know all the answers but the major decline in gas E/W (and diesel E/W) over the last few weeks probably suggest Asian demand loss has close to matched supply loss so far (plus incremental cargoes from the West have helped).

But, Asian run cuts probably have nowhere near peaked yet, delayed by drawing down crude on water, supplemental WTI and LatAm flow, government and commercial crude inventory drawdowns. Flat price is down a lot too, so there is less of a signal to cut demand.

The longer this conflict goes on, the worse will be Asian supply cuts in particular and therefore gasoline supply, with seasonal demand also kicking as supply drops.

What’s worse, lighter slates, large (but no longer massive) diesel premiums, and a need to claw back 0.5% resid to feed the bunker pool mean gasoline yields and RFCC operations favouring light end output are going to come under pressure.

Cracks should rise generally unless demand completely capitulates, but cracks and spreads will surely cyclically price too little or too few runs over the summer too.

What I do feel certain on is that supply cuts likely progress through Q2 and could peak as late as Q3.

For now, E/W at negative levels have pushed May and June delivery Singapore origin barrels close to being the cheapest supplier in Pakistan (ARA currently cheapest), and Mexico RoC (Houston currently cheapest for Regular but Sing cheapest for Premium). In fact we have seen a prompt loader fixed yesterday on the route.

(Singapore cheapest into Rosarito Premium)

I’d suggest once Sing 92 hits levels that are able to push a few more cargoes out to those locations, we should see E/W (and Sing 92 spreads) finding a floor. Note, I also think EBOB spreads might be a little strong short-term despite having already sold off some; see below.

Over in the Atlantic one of the bigger price moves has been the TA Arb. May has risen to a 6-week high on a net-RVO basis and might look a little toppy now.

That has helped turn ARA barrels competitive in various destinations over Houston, including, newly, Mexico City Tuxpan for May delivery.

The May ARA-NYH RBOB blender margin is a bit closer to open than for some time, but still 5cpg closed and therefore not yet bullish ARA complex.

(ARA gains ground in key Atlantic Basin outlets)

Have we reached a ceiling on US vs NWE paper pricing yet? I am in two minds since imports into PADD-1 have been extremely low and need to rise to help supply for the summer season and assuming that Sing will soon start to price for more help from WoS to cover Eastern shorts.

What’s more, EBOB E5 blend margins are wide open (typically a ceiling for paper spreads) just as ARA is close to losing some of the marginal Eastern outlets that have been supportive over April.

Lastly, the relative TC14 vs TC2 picture is bearish in favour of TC14 given high vessel supply and a poor cross-barrel arb picture out of the USG (including the diesel arb to Rotterdam).

Freight can thus help re-open Houston’s outlets without a move needed on paper pricing. Generally, US gasoline stocks are not yet low, but are beginning to draw at a substantially faster pace than over recent years.

A big change that also factors into all this is gas-nap which is now particularly wide, largely on naphtha’s selloff globally (which we think it pre-mature).

ARA reformate premiums have sold off into that gas-nap signal. This is partly seasonal, but also suggests we are going to get more pressure on EBOB short-term – check out the +$20/mt May E10 blender and ref margins.

Overall then, this paints a somewhat bearish short-term picture for EBOB spreads. That seems to make sense now that we are pricing May when TARs in Europe are likely wrapping up, and margins are starting to look better with physical Brent premiums having collapsed.

Seasonal demand isn’t strong enough yet either. This all might not last long if the SoH outlook becomes more clearly bullish oil, naphtha re-gains momentum, and Sing 92 starts to price extreme supply cuts once again.