Light ends summary: Transatlantic gasoline arb closes, naphtha margins tumble

27 May 2022

Quantum Commodity Intelligence - European gasoline cracks soared to a fresh record highs on Friday as it closed the transatlantic arb to temper a surge in westbound exports, while naphtha cracks hit 13-year lows this week amid a rising supply and a lack of octane to blend.

The Eurobob June swaps rose over $80/mt on the week by the Friday European close to reach $1,310.50/mt, with the crack rising over $5/b on the week to $43/b – a fresh record.

At the same time, RBOB futures were only marginally higher on the week to $3.86/gallon by time of press, narrowing the premium of RBOB to Eurobob to just $8.7/mt by Friday morning, effectively closing the arb.

The spread jumped to $30/mt at the start of the month, which spurred transatlantic flows, draining ARA gasoline stocks, with over 840,000 mt of gasoline expected to have made the journey this month, shipping data showed.

While most of those volumes have been shipped to the US East Coast, US nationwide gasoline stocks were drained for an eighth straight week to May 20, as they tumbled to 7.7% below the five-year average at 220 million barrels, EIA data showed.

That sharp drop in stocks – even with the US driving season yet to officially start next week – came despite subdued demand and higher output, with most of the excess supply drawn away by exports heading for Central and South America.

US gasoline demand was down to 8.8 million bpd, some 3.6% below the seasonal average, as record retail prices curtailed demand, while exports were 15% above more normal levels at 774,000 bpd, EIA data showed.

Demand in Europe remained muted as well, with gasoline sales in the UK rising just 0.9% during the third week of May after they were mostly flat a week earlier as retail prices set fresh records.

Refineries are, however, responding to the soaring gasoline cracks with the US utilization rate reaching 93.2% with the rate in the US Gulf topping 97% - its highest level for this time of year in the past 30 years – which could bring some relief to cracks.

In Europe, refineries have ramped up their throughput by 20% between March to May, Vortexa data showed.

Gasoline cracks in Asia went the other way, falling over $7/b on the week to $31/b and cooling from their record highs after South Korean refiner S-Oil restarted a unit at the start of the week following a fire late last week.

Naphtha cracks tumbled

The surge in refining activity in Europe, coupled with higher imports from the Mediterranean and the US, have “overwhelmed” the naphtha supply side in northwest Europe, a broker told Quantum, causing cracks to tumble to 13-year lows.

The NWE spot naphtha CIF crack hit -$16.61/b on Tuesday, levels not seen since the last financial crisis in 2008 and down from $3.95/b at the start of the year.

Naphtha is becoming “sort of a by-product in the current market,” the broker added, with blending into gasoline limited by a shortage of octane boosters.

While imports of octane-boosting blending components into Europe have been on the rise since last November, Vortexa reported, MTBE prices soared this week as blenders aim to lock in the sharp premium of gasoline to naphtha.

That spread hit $502.50/mt on Friday, compared to more normal levels of $50-100/mt for this time of year.

Weakness in the naphtha market has also come from weak petchem demand, with Germany’s sector – the largest in Europe – producing 1.1% less in Q1 as they struggled with soaring gas and energy prices.

Naphtha demand from the Asian sector remained muted – which caused more volumes to flow to Europe – as naphtha cracker margins remain uneconomical with those crackers who can shift to the more competitively priced LPG.

While Japanese ethylene production rebounded from a record low in April, aromatics output tumbled to an 11-month low, implying crackers started using more LPG, which yields fewer aromatics and more ethylene.

The discount of propane to naphtha CIF Japan stood at $61.50/mt, compared to a discount of $28.25/mt at the start of the year.