TC2 gasoline arb opens for the first time in several months as summer blending demand pulls ARA barrels West

Barely one week since the bullish call on Sing 0.5 complex in the last commentary and here we are with Jun cracks hitting +$17.5/bbl yesterday before correcting to $16 as of this writing while Jun 0.5 EW hovers right around $80/MT. While the direction and magnitude was, if you’d allow me to say this once upon a time, expected, the speed of the move definitely surprised me as I was expecting some sideways action for another week at least. Let’s revisit the different angles mentioned in the last commentary and see what has changed week-on-week. The very big gap between Dangote value as feeds into the West vs the better quality MED straight-run streams has narrowed significantly to a more normalized level – barge cracks alone did the majority of the work here. That definitely suggests a return to the usual for Dangote flows at these values i.e. into blending in Singapore.

That also tracks with projected VLSFO blend margins. A firmer Sing low sulphur complex week-on-week has allowed our forward blend values to flip back to a small positive. These levels are not yet concerning to me but they do mark a noticeable change in dynamics here.

Having said that, a couple of admittedly more theoretical charts below do suggest the West still feels significantly more desperate for feedstocks than the East which is probably not a controversial opinion looking at how products are behaving right now.

Market has also started to correct the other point I was driving at the last few weeks, that is, the incentive to convert heavy sweet crudes e.g. Dar in the Northeast was overwhelming the pull by the bunker pool in Singapore by a huge margin. This gap is still bigger than what we saw last year, especially in the front, but has corrected very significantly week-on-week which is only fair given our argument for the relative inelasticity of bunker demand compared to transport fuels.

What about arbs flows from the West? This is the one of the brighter spots that still haven’t changed much. Rolling front month Rott-Sing arb still looks very unattractive currently so I continue to expect a relative lack of arrivals from late May onwards at these levels.

Jun 0.5 EW, on the other hand, has corrected up to right around where the physical cost of moving a Suezmax from Rotterdam to Singapore currently stands, which is the value 0.5 EW has historically mean reverted to. But don’t take mean reversion for a ceiling – it’s literally quite the opposite of that as values tend to overshoot both ways then correct.

So am I getting bearish from here? I am not, but the truth is that the risk reward for an entry point at these levels looks a lot less attractive than what it was just last week when we had the perfect confluence of factors. Personally, I do see room for maybe another $3/bbl on June cracks here (I promise it’s not a random number and I have a model), barring another insane tweet but again it’s no longer where I would be comfortable for an entry. I would also watch bunker enquiries for the next buying cycle carefully going into late May. More thoughts on runs cuts for a later piece.

About the Author
Hoa brings extensive experience, having led fuel oil analysis at Trafigura and worked across crude, diesel, and APAC power markets. Hoa now leads the development of Sparta’s forward-looking tools for fuel oil and feedstocks.

About Sparta
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