Gasoline markets have tightened considerably over the last month, thanks in part to a wave of buying by Venezuela’s PDVSA amid a spiralling crisis at its refineries. This buying came just as resurgent West African gasoline demand soaked up supplies and as European refineries entered turnarounds. Meanwhile, as US gasoline stocks plunged, the market awoke to the need to reopen the arbitrage from Europe to the US East Coast to meet summer demand.
The three-way tug of war between the USEC, Latin America and West Africa has done much to perk up prices and spreads. In short, the market has taken on a much more bullish tint compared to even a few weeks ago. But RBOB has again grown complacent about the prospect for arbitrage flows from Europe. If the strength in Eurobob and US Gulf gasoline values persists, then New York Harbor gasoline markets will struggle for resupply at current prices and spreads.
If anyone is looking for a single indicator to show just how different today’s market is than last year’s, the current strength on the US Gulf Coast is a strong contender. Unlike last year, USGC RBOB started April trading at a discount of less than 2 cents to the futures price, so a USGC refiner would lose money shipping the barrels to New York to deliver against the futures contract. This means there are better markets for USGC gasoline than the US East Coast.
We see a potentially bullish scenario in the second half of the summer. If Nigeria switches specs to 150 ppm on 1 July, it will become a more direct competitor with Latin America and the USEC for supply. European gasoline flows to Nigeria and Ghana are volumetrically equivalent to the flows to the USEC at around 0.3 mb/d but the competition will be far more direct if Nigeria starts demanding higher quality fuel.
China’s threatened crackdown on the mixed aromatics trade is a risk to this bull scenario, but if the campaign proves half-hearted, the fight for European barrels will be even more intense. European naphtha length, on the other hand, is already growing due to the lightening global crude oil slate and will increase as lower-octane blending components are pushed out of the gasoline pool. Given the speed at which Nigeria seems to be trying to effect its specification change and our belief that China cannot forgo imports of octane in some form, we are raising our RBOB gasoline crack forecasts by $2 per barrel.
But before fiercer competition for octane begins, a market lull is likely to develop unless more refinery problems crop up. With USGC and European plants exiting works and pre-Ramadan (starts 26 May) stockpiling likely to fade in the coming weeks, the pace of stockdraws at key market hubs is likely to slow as supply rises and demand remains below its summer peaks.
With the summer driving season looming, May often sees peak USEC imports and European gasoline exports to the USEC. After the initial unwinding of stored gasoline, Europe often has less supply for USEC over the rest of summer. So once the initial deluge of late spring imports has been priced in, Eurobob will be a key indicator of RBOB prices. If Eurobob stays high on good non-USEC demands, RBOB will need to rise to reopen the arb to ensure resupply is available.