Commentary summary:

The Asian gasoline market continues to strengthen towards the end of the year, widening the E/W spread and boosting arbitrage economics from Europe for January and February arrivals.

The E/W rebound since late November positions it in positive territory for the remainder of the year, and the sharp rise in the SING 92 spread has consolidated backwardation across the entire timespread curve.

The strength in Asia contrasts with cracks trading lower in the West, particularly the RBBR, which has seen a correction of over $2/bbl in the past two weeks.

However, the US balance continues being tight, with current nationwide inventory levels at their lowest in 8 years.

Alongside the low PADD 1 stock levels, we have also observed a recent improvement in USGC economics for arbitraging within the Atlantic Basin.

Currently, it stands as the most profitable option in key Western outlets, except for Nigeria and Peru, where the European alternative remains the cheapest option, although the spread between landed values for US vs ARA MRs into Nigeria remains much narrower than usual.

This bullish stock picture and the strong competitiveness of USGC gasoline barrels in foreign markets are tightening blending components in the region. With the European market finding its best opportunities in Asia, it is likely that we will soon see support for the recent RBBR correction, as has already begun to emerge in the prompt RBOB timespreads over the past sessions.

On the European side, the improvement in arbitrage economics to the East is becoming more established.

As we mentioned last week, Europe currently offers the best netback in most East of Suez markets, both via the Red Sea route and the arbitrage alternative through the Cape of Good Hope.

The recent increases in the E/W spread have widened the differential against key Eastern suppliers such as Singapore and the AG, solidifying Europe as the most cost-effective origin for East Africa, Australia, and Southeast Asia deliveries for the second half of January and February.

The improvement in Eastern economics is not the only factor driving short-term European demand. The margin for blending E10 locally remains slightly open, referring to the option of purchasing components in the local market to blend and sell E10 cargoes in Europe.

As we noted last week, this factor boosts demand for components, whose prices have continued to rise this week due to increased blending opportunities in Europe.

However, it limits the rise in EBOB cracks and spreads that could result from the increase in arbitrage opportunities to Asia, as it implies a higher proportion of the product will be sold locally.

In summary, the current market strength will shape European blending demand in the short term amid a rising E/W, while US PADD 1 inventories continue tightening the western balance, despite PADD 3 showing levels above the past three years.

USGC export incentives within the Atlantic Basin remain in place for another week, leading us to maintain a firm outlook for the global gasoline market. We anticipate that, during the final weeks of the year, part of the strength accumulated in Asia will also transfer to a Western market with abundant export opportunities and blending components trading higher, outperforming the recent movements in EBOB and RBOB paper.

Source: Sparta Commodities