EBOB cracks have rebounded strongly over the last ten days, while front spreads remain historically strong if partly crude-driven. So, is there a real squeeze on prompt supply or has the market overcorrected for September losses? The evidence suggests the latter, meaning this rally has run its course for now.
Firstly, ARA`s relative strengthening means the hub is beginning to price itself out arb-wise, with ARA’s advantage as the cheapest source into Brazil, Colombia etc. for Nov delivery now lost to Houston once again. Houston is competing more aggressively for these barrels and with a further relative weakening there on the cards (see below), ARA should be dragged lower.
The Nov TA arb itself remains shut for all but the most advantaged players in ARA with our blender margin at -3.30cpg as of this morning, albeit up from the -10cpg seen in early Oct. The December TA tells a similar story. What’s more, PADD 1 runs are already low, likely on turnarounds, meaning we could see another 50-100 KBD of refinery mogas supply return in the short term and with stocks there no longer critically low.
Nov E5 blender margins into ARA remain negative and took a substantial turn lower this morning, but EBOB can ill-afford to price up to support these margins given the above. Nov E10 blender margins are telling this story, having made a brief foray into firm positive territory late last week but then quickly eroded early this week, dipping to –1 $/mt this morning; the market is attempting to snuff out marginal supply for the time being.
In Asia, a rebound in the Nov E/W this month began to ease off last week and has fallen further to -$1.60/bbl this morning. A further Asian weakening is on the horizon, with the physical impact of hefty East of Suez refinery turnarounds having already peaked and with Chinese refiners potentially upping exports.
Pressure is also coming from the AG which has now retaken the role as the cheapest source of supply into South Africa (ahead of ARA), and is competing hard against Singapore barrels into the AG itself.
Houston has seen a substantial relative weakening over the last few days, now pricing more firmly into core arb locations in LatAm but also squeezing out ARA in the more marginal Latam locations. It is hard to see pressure out of Houston easing off with seasonal fundamentals weak, US demand indicators mixed at best, and inventories in PADD 3 ample.
One important question ahead will be the extent to which US refineries (largely mogas-focused) can now minimize light ends output further given crack levels. Possibly any extra supply adjustments need to come from the marginal percentage point of utilization rather than through yields, in which case by now seasonally-average mogas cracks need to correct lower.
Neil Crosby is an experienced energy market and commodity analyst, specialising in crude oil, oil products, biofuels, and carbon. With roles at OilX and JBC Energy, he has extensive expertise in global oil industry analysis, forecasting tools, bespoke research, and client communication. His focus on refining and petrochemicals underscores his specialisation.
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