The worldwide gasoline market seems to be looking for the next big move.
Over the past month we have been moving sideways on both cracks and spreads and what can be considered elevated historical levels.
But we are yet to test last years’ highs and the market is looking for the next fundamental reason to justify such a move. The question is where will that come from?
In terms of demand, last week we saw a first spike of TA demand, as ARBs from NWE opened for the first time since the beginning of the year, particularly from refiners.
This spike was short-lived as TC2 jumped from 150 to 200 WS in just a couple of days. Since, other parameters such as gas/nap and TA Arb are slowly adjusting its levels to compensate for such a sudden freight love, but the prompt arb to NY has fallen back to negative territory.
On the other hand, summer TA demand is now open for NWE refiners roughly 1cpg. This is clearly not enough for traders to lock in forward arbs, but it’s a step in the right direction as we move into summer. On the other hand WAF demand has completely dried up recently, providing limited support in the short term.
On top of that European naphtha bullish story seems to be running out of steam. Both prompt cracks and spreads have come off recent highs and we are seeing a much more ample supply in Europe.
Proof of this is that ARA is now the cheapest source of supply into Brazil and we have seen increased Brazilian demand for both gasoline grade and naphtha over the last days.
This has obviously had an effect in gas nap that has jumped from the lows at 112 $/T to now currently trading at 153 $/T in April. This has greatly benefit European blend margins, ensuring Europe’s gasoline competitiveness in the Atlantic basin.
ARA is currently the cheapest source of supply into most Atlantic basin destinations and particularly Mexico and Canada. Once again, keep an eye on Mexico as not only it can have a great impact on USGC demand, but as we can see on Sparta’s Cloud Blender, Mexico grades use up to 65% of E5 in summer.
Indeed, despite the slight drop in reformate values in Europe (10 usd/t cheaper since last week), E5 and E10 blend margins remain at historical lows. E5 blend margin is currently -25 $/t for April, whereas the negative blend margin for E10 is -5 $/T.
Both grades remain the most sought after blend components in most blends including Mexico (as mentioned before) but also RBOB (for E10) and WAF (for E5). Interestingly as we look at the forward curve for both E10 and E5, market is still valuing E10 at a premium to E5, but the blend economics seem to indicate that E10 is actually cheaper to produce than E5 by 10 $/T. Will we see a realignment of values there?
In the meantime reformate usage remains low across all blends. This means less naphtha demand in the gasoline blend pool and only reinforces the above trend (higher gas/nap and better blending economics). Although if Atlantic demand from NY, WAF and LATAM does not pick up, then gasoline will lose momentum and we will revert back to test the 100 handle on gas nap.
Felipe Elink Schuurman is CEO and Founder of Sparta. A former trader, Felipe drives strategic vision and growth at Sparta. Before Sparta, Felipe worked and traded for BP, Vertical and Gunvor.
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