World in backwardation, upside risk

Deep Dive Summary:

• RBOB: Bullish RBOB Oct/Nov spread, Bullish GC CBOB / RBOB Oct
• EBOB: Bullish EBOB Oct/Nov spread
• SING92: Bullish Sing 92 Crack Nov, de-risk from bearish Gas E/W Oct call.

RBOB:

The market has mostly reacted as one would have expected given the developments of the past few days as the conflict in the Arabian Gulf spreads towards more directly impacting Saudi Arabia and the Bab el-Mandeb Strait.

This has continued to pressure flat prices, cracks and spreads globally, while net longs in managed money RBOB have gained to 93 million barrels.

(Retail prices for gasoline are high but not at records yet, Sparta via US Bureau of Labor Statistics and EIA)

As flat prices continue rising, concern for demand destruction is set to re-assert itself into the macro narrative.

On an inflation-adjusted basis, gasoline has deviated from diesel in remaining relatively cheap against its own historical retail peak, set in 2007. Though, market players remain concerned about a product export ban.

As of the current moment, our position remains unchanged that a product export ban is unlikely.

That said, pressure on the Trump administration prior to the mid-term elections in November is set to prompt a higher risk profile in the short term for such an action.

Meanwhile, US Senate Majority Leader John Thune is beginning to float the idea of a diesel export ban, as US retail diesel prices reach an all-time high. We will provide an update should these fundamentals begin to change.

US gasoline prices are set to rise further over the coming weeks as the domestic supply picture tightens, with PADD 2’s Exxon Joliet (275 kb/d CDU cap) refinery suffering a brief total power outage; the refinery has since come back online.

Planned activity is also getting underway at BP’s Whiting refinery (435 kb/d CDU cap), plus another 330 kb/d of PADD 2 planned outages.

(Import re-supply for US inventories remains unworkable)

For US inventories, marginal supply losses from regional turnarounds and brief outages will not find supply from external imports. PADD 1 import opportunities remain firmly closed from ARA for the foreseeable future. Arbitrage opportunities from East of Suez remain shut due to elevated E/W prices and freight prices remaining expensive.

NWE refiner economics remain unworkable into New York as backwardation due to tightness in Europe continues to challenge exporters, keeping the TA arb shut while TC2 freight begins to gain in the region.

(Houston continues to land cheapest across most of North and Central America)

The backwardation in Europe continues to allow for Houston to land cheapest across the vast majority of North and Central America across October delivery windows.

The one exception to this has been declines within Singaporean blend costs for Mexico RoC specification grade into Rosarito as Asian MTBE and alkylate have weakened, offsetting gains made in Singaporean LVN.

South America continues to remain split between high- and low-octane differentials between Houston and ARA exporters for October delivery windows. This is despite a recent gain in regional clean product freight rates; tonnage is set to remain high.
Current supply is 26 vessels in the seven-day window against an average of 19, allowing for exports to become increasingly attractive while flows are heard to be increasing from the USGC.

(US Gulf fundamentals suggest to roll the bullish outlook into Oct GC CBOB / RBOB)

As exports remain attractive on a landed basis, the outlook is for GC CBOB/RBOB October and prompt cycle differentials to find support, as seen in Cycle 54–56. September has remained generally range-bound, but there is some evidence to suggest the export window from the US may find an additional level of support.

(All components excluding sweet and sour light naphtha and heavy naphtha find support in PADD 3)

As noted in last week’s deep dive, high-octane components globally continue to tighten. Houston’s components have performed in line with this view, with the notable exception being the light sour and sweet naphtha streams and heavy naphtha.

Arbitrage opportunities for light naphtha have closed to New York on an NJA basis, with Brazil remaining an outlet for light naphtha, while heavy naphtha has open arbitrage opportunities for September loadings to Chiba, Yeosu and New York.

Houston blender margins for A-grade and M-grade (grades comprising a high percentage of light naphtha) remain firmly negative despite the weakening in these prices.

There is also a seasonal effect that impacts heavy naphtha, in that there is less demand for blending following September 15th onwards due to seasonality change. This is because it has a lower RVP that benefits summer grade. While the current light sour market is being impacted by global weakness in unfavourable cracking margins.

Notably, the final regions across the Americas that Houston is unable to reach are Brazil, Argentina and Ecuador in October delivery windows. Brazilian and Ecuadorian blends both currently call for a high blend percentage of light and heavy naphtha components.

With arbitrage opportunities closing elsewhere, this may allow for Houston to retake some of the outlet regions deeper into South America into October that it thus far has been unable to hold on a sustained basis.

This would continue to lend support to blend costs in the US, supporting GC CBOB (A-grade) and RBOB (F-grade) via heavy naphtha and M-grade demand, while inventories would continue to draw in the US, supporting the current outlook to remain bullish RBOB Oct/Nov futures time spread and Oct GC CBOB/RBOB diffs.

EBOB:

EBOB spreads, cracks and flat prices are being dragged higher by the gains in ICE Brent. Fundamentally, the market has added a new challenge to the mix: the cancellation of late September crude loadings into Europe, as the East-West pipeline is set to be offline for the coming weeks while repairs get underway at the struck pump facilities.

The bulk majority of crude flows into the Mediterranean originate from CPC and the wider Atlantic Basin, but this does materially tighten the market.

Saudi Arabian crude is no longer set to be delivered into the wider Mediterranean region, prompting resupply enquiries, even with turnaround season arrives on the wider European continent.

The problem on the European continent is a familiar one throughout this moment of extreme tightness: the backwardation faced by the market is unyielding as gasoline inventories remain extremely tight. Barges in Rotterdam continue to reflect this tightness, remaining at +$150/mt, keeping liquidity in barges low.

(There are a limited number of solvers are present within the EBOB market)

Solvers at this point remain hard to find. Seasonally increasing levels of butane in European specifications will allow for some level of relief in summer components, though storing at this point is infeasible at this backwardation.

This has allowed for blend costs to weaken in the prompt, opening E5 blender margins into the prompt to +$11/mt as the gas-nap and E5 sales prices continue to rally.

(Deliveries into Africa favour European exporters in the Atlantic Basin for October delivery)

On a landed basis into October, European origin cargoes are landing the most attractive into Western and Southern African outlets. A key change noted from the week prior can be seen in Ghana 91 RON into Tema late October deliveries, where Houston has been challenged by ARA as blend costs in Houston have gained.

Houston’s waning competitiveness has been driven by gains in Houston’s MTBE and toluene/xylene (TX) pricing, allowing for European origin to land more competitively into the region for October.

A key caveat of the current market, which may become a bigger focus in the coming days, is the lack of AG supply available to the market. Given the downtime of the East-West pipeline in Saudi Arabia, reports of cancellations of product cargoes would lead to significant gains in EBOB spreads as shorts primarily in Eastern Africa and South-Central Asia, typically covered by AG cargoes, will need to be filled, lifting the entire complex.

(EBOB Oct/Nov Spread continues to gain)

Though, for now the backwardation within the European market, keeping long-haul routes for all origin regions infeasible, continues to point towards European spreads continuing to appreciate all things considered into October.

SING92:

(Sing92 spreads follow the complex, but the rally extends considerably as crude flows to Asia are increasingly disturbed)

Towards the end of last week, I published a bearish call on the Gas E/W Oct spread that thus far has performed as was expected, driven by extremely high freight preventing Singapore origin cargoes from landing cheapest on a global scale.
Though, as the Saudi East-West crude pipeline news has broken, I would suggest de-risking and looking elsewhere for gains considering what could be at stake should the outage be prolonged.
The primary risk here is Saudi crude runs being impacted by the loss of E/W export capacity and/or product export cargo cancellations. The loss of European crude imports for September loadings of Saudi Red Sea crude is meagre compared to the risks of potential loss of crude headed eastbound in terms of flow volume and impact on the market.

(Gas E/W Oct)

From a landed perspective, should these restrictions occur, this would immediately tighten the Sing92 market relative to the EBOB market as crude runs reverse trend and expectations of supply from Asia decline.

Though, European volumes may have to begin to price into regions such as Eastern Africa and South-Central Asia that typically don’t receive cargoes from this origin, particularly at a time of such acute tightness within the Atlantic Basin. The risk of E/W spreads swinging wildly at this point is considerable.

(Sing92 cracks would gain considerably upon disruption of steady state runs)

Thus, a safer form of representation at this time becomes outright representation of crack spreads.

Given what run cuts would mean for the wider Asian gasoline complex and the current roll fundamentals despite the record-high valuations, Sing92 crack spreads look set to gain considerably under such a scenario.

This is particularly for tenors in early Q4 2026 onward that would see the shortfalls of crude headed eastward for steady state, presenting a bullish opportunity to buy the November Sing92 crack.

(Blending components in Asia are gaining, with CN 92 Oxy 2 being a notable rally)

Currently, a risk to this position is Sing92 blending margins remaining open at +$3.30/bbl in the prompt as blend percentages have been able to mitigate the response in some regional blending components.

A concerning rally seen on the Singapore component market has been the meteoric rise of CN 92 Oxy 2 in Singapore, as it may indicate an upcoming lack of Chinese export supply set to arrive in the window into Singapore, in effect validating the crack position as markets would be set to rally considerably.