The approach of May, a traditional turning point in gasoline markets, as well as mounting speculative length in gasoline, is unnerving the market. A selloff to flush out weak longs may happen soon, especially with RBOB cracks against Dated Brent nearing the highs seen in past years. The combined net length of managed money and other traders has reached nearly 27% of open interest in RBOB futures, according to the latest data from the US Commodity Futures Trading Commission. While below the high levels seen in recent years, the extent of current speculative length is considerable.
Yet the factors that underpinned the rally in gasoline values this year have not been undermined. Gasoline demand in the US appears strong, stocks are low and imports to the US East Coast have been extraordinarily weak. Supply in Europe is tight on low refinery runs, while demand is stable and even rising in some countries. An RBOB correction may offer a good opportunity to position for strength in time spreads, as weak inventories leave little cushion for unplanned outages.
Physical strength in parts of the market is evident. Mediterranean gasoline values are climbing against ARA gasoline, which has sold off in sympathy following weakness in RBOB futures. Similarly naphtha values in Europe have held up, cutting the discount to gasoline in recent weeks on strong Asian petrochemical demand.
The other supporting aspect for RBOB is West African demand, which will help to absorb much of the expected rise in European refinery runs. Indeed, Nigeria is seeking up to 1.85 Mt of gasoline for delivery throughout June to supplement its Q1 14 orders in case of non-fulfillment of some deliveries, to ensure country supply. The shutdown of the country's 0.125 mb/d Warri refinery, due to oil thieves tampering with a pipeline that carried crude to the plant, adds to the buying pressure.
Latin America also adds to the support. Mexico plans extensive refinery maintenance in June while turnarounds in Brazil are likely to pick up once preparations for the World Cup are complete. In both cases, gasoline import demand is likely to increase. Brazil may already be forced to increase gasoline imports after a power failure at its 0.24 mb/d Duque de Caxias refinery outside of Rio de Janeiro in late April. Venezuelan gasoline imports are falling off, however, as the country's economy falls into recession. Reduced supply to allied countries may also be resulting in some refined product for export. Having said that, Venezuela remains short of octane due to operational problems at its 0.645 mb/d Amuay refinery, which is ultimately supportive.
Middle Eastern gasoline demand also posted healthy growth in February as Saudi Arabia bounced back from weakness in January to post its strongest monthly rate of consumption growth since June 2013. Growing demand in Oman and Qatar is also helping to offset weakness in Iraq, while Iran's move to reduce retail subsidies may not be as bearish as it initially appears due to the country's plan to phase out blending petrochemicals products into domestic gasoline.