Gasoline exports, run cuts boost light distillates, but downstream pressures weigh

London — Refinery run cuts and strong export interest in gasoline have over the last fortnight boosted prices for light distillates, which are expected to continue their domination of the refined products complex into the fourth quarter. However, lower blending of octane boosters that complement naphtha into the gasoline pool painted a more bearish picture for October.

The Northwest European gasoline market has been boosted by favorable arbitrage economics to the US, West Africa and the Mediterranean. In the week beginning Oct. 5., 5.47 million barrels of gasoline were delivered to West Africa, up 6.9% on the week, and the highest weekly volume since March.

The premium unleaded 10ppm FOB AR barge, where West African demand has driven liquidity, was assessed at a $14/mt premium to Northwest European gasoline benchmark Eurobob Oct. 5 -- almost three times higher week on week. West African gasoline demand has been driven by a lack of local refining capacity, coupled with rising gasoline consumption as the monsoon season ends in the region.

The US is also continuing to generate robust export demand from European markets, with 1.36 million barrels flowing from Northwest Europe to the US Atlantic Coast in the week commencing Oct.5, flat on the previous week. Arbitrage to the US typically opens during the Atlantic hurricane season due to disruptions to Gulf of Mexico refining capacity. Additionally, UK Continent-USAC freight rates for Medium Range tankers typically moving gasoline were declining with a 1.4% drop week-on-week to $13.77/mt Oct. 5.

In the Mediterranean gasoline market, a supply squeeze has also seen buyers seeking volumes from Northwest Europe, offering further export-led support to the region's refiners amid run cuts and declining margins.

"The main difference on the supply-side in the Mediterranean market is the gasoline flows from the North," a trader said.

Naphtha rally justified?

Turning to the Northwest European naphtha complex, this has continued to rally, reflected in the NWE CIF crack spread versus ICE Brent front-month crude futures -- which doubled on the week to close at a near three-year high of 90 cents/b Oct. 5. Refinery run cuts across Europe supported prices on the supply end, while a seasonal shift in demand for naphtha cracking versus LPG and an interest in naphtha for use as a gasoline blendstock drove demand.

Refiners could be bidding up the crack spread to hedge against their crimping of run rates or scheduled maintenance, while other participants could be buying the spread based on their view of a strengthening market.

The increase in blending demand for naphtha, however, was more associated with gasoline exports than domestic consumption. Northwest European domestic blending margins as indicated by November's gasoline Eurobob FOB AR swap versus NWE CIF naphtha were poor, closing at $3.75/mt Oct. 5, down 69% on the week and averaging $6.23/mt on the month compared with $79.84/mt in the same month last year.

"The arbitrage to the US has improved this week and must have helped to clear some length of naphtha in NWE but I think the strength is more coming from refinery trims," a source said. This was despite winter gasoline often containing 10-12% butane against around 2% during summer, which usually displaces naphtha from the blending pool.

The NYMEX RBOB crack versus Brent frontline swap averaged $8.14/b in the week to Oct. 5, up 5% week on week, indicating a healthy gasoline arbitrage to the US.

However, physical naphtha was lagging the momentum seen on paper, the latter possibly influenced more by expectations than underlying fundamentals. Despite several favorable drivers for naphtha expected to support the market into the winter, the divergence between the physical and swaps markets could result in a downward correction.

"It seems [the RBOB/Brent crack] just follows any bullish news, it goes up with crude on bullish news and also goes up with crude going down on better margins," a source said.

Bearish view downstream

The premiums of gasoline blendstocks MTBE and ETBE over Eurobob remained under pressure despite small gains, capped by inadequate blending economics, signaling lower blend values for high octane components.

This led to lower profitability for blenders to use low RON naphtha as a blending component, which combined with the increased butane participation, meant less need for octane boosters such as MTBE and aromatics, typically complementing light naphtha into the pool particularly during summer.

The MTBE premium over the November Eurobob gasoline swap kicked off October at $60.25/mt, compared with $210/mt Oct. 1 2019.

"MTBE looks already down from where is was on July, it would go down further," a seller said.

A storage glut of MTBE and C4 feedstock in the Persian Gulf forced producers not to reduce MTBE production but export it even at lower prices, while MTBE availability in the Amsterdam-Rotterdam-Antwerp hub was expected to remain healthy.

The ETBE premium over MTBE stood at £305.25/mt at the beginning of October, an all-time-high, supported by the ultra-wide price difference between feedstock methanol for MTBE to ethanol for ETBE. However, ETBE's strength relatively to Eurobob gasoline was also under pressure amid weak blending economics.

Aromatics demand for blending has vanished, with little interest seen for either mixed xylenes or toluene.