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The European gasoline market largely disappointed most gasoline bulls who were awaiting a repetition of the record-high strength observed in the summer of 2015. Despite signs of healthy demand in the US, arbitrages from the net-long European gasoline market have suffered, as stocks levels in the US -- whose summer driving season is typically expected to provide bullish support to the global gasoline complex -- remained high.

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As one gasoline trading source said, "This year it is a big disappointment for gasoline -- demand is there, but stocks are just too high," adding that the market had become "difficult to follow," due to the non-seasonal behavior of gasoline fundamentals in the summer of 2016.

HIGH STOCKS BRING BEARISH MOOD

Market sentiment has largely revolved around the high volumes in the market, with ample supply pressuring values of gasoline globally. With refining margins largely positive, due to a strong performance of the middle-distillates and fuel oil cracks, gasoline remained under pressure from the constant resupply available, as the fuel became almost a by-product of refinery output.

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According to an industry report, as of the beginning of September, stocks in the Amsterdam-Rotterdam-Antwerp area had risen to 36.2% over the five-year average to an overall level of 8.28 million barrels.

The latest figures from the US Energy Information Administration showed that stocks levels in the US -- the world's largest gasoline consumer -- stood at 225.2 million barrels, having grown 6.4% compared with the same time last year.

While European gasoline demand growth has been largely flat, US gasoline demand -- typically more price-elastic than Europe's-- has seen a 4.5% increase on a year-on-year basis, according to EIA data.

ARBITRAGES SUFFER

The global growth in stocks also pressured arbitrage deliveries from the net-long European gasoline complex.

While US demand has been growing to near record highs during the summer, ample supply has meant a more limited arbitrage flow to the US Atlantic Coast, a traditional outlet for Europe's excess barrels, with European prices tracking the values in the physical market at the New York Harbor in order to maintain a small arbitrage window.

Despite a narrow arbitrage to the US toward the end of September, primarily due to logistical issues due to an outage on the US Colonial Pipeline, the trans-Atlantic cargo flow has remained largely marginal, keeping volumes in Northwest Europe and pressuring prompt values of the Eurobob gasoline barges.

As a measure of the inherent weakness, Eurobob gasoline barges have remained consistently at a discount to the front-month swap throughout July and August.

A limited arbitrage flow to West Africa has also contributed to the bearish pressure in the market. Fundamentals for WAF-grade gasoline -- typically exported from the ARA region -- have been compounded by Nigeria's limited ability to import on the back of a lack of liquidity in its foreign exchange markets, with importers struggling to secure hard currency to import dollar-denominated gasoline.

A decision at the end of June by the Central Bank of Nigeria to abandon the currency peg of the Nigerian naira to the US dollar -- previously pegged at Naira 196.50 to the dollar -- and move toward a free floating exchange rate, in an effort to increase liquidity in the foreign exchange market, was welcomed initially by gasoline importers. They saw it potentially as a catalyst for gasoline imports in order to be able to secure the dollar-denominated gasoline and onwards sell on a Naira-denominated basis.

The government also cut the subsidy on imported gasoline in May allowing marketers to sell the product on the domestic market at a capped price of Naira 145/liter, but private companies still faced the challenge of the lack of dollars.

The move, hailed as a step towards liberalization of the market, was aimed at reducing fuel shortages in the country, in an effort to increase private marketers' ability to secure Letters of Credit.

However, liquidity in the foreign exchange market remained largely low, with most of the liquidity concentrating in the parallel foreign exchange market, where the downward pressure on the naira remained acute, with the currency falling in value to over Naira 400 to the dollar in the unofficial exchange market. This added to the demand shock created by the more than 60% increase in the retail price of Nigerian gasoline, which kept the market for WAF-grade gasoline largely bearish throughout the quarter.

AUTUMN MAINTENANCE SET TO PROVIDE SUPPORT

Toward the end of the quarter, nevertheless, expectations of a supportive refinery maintenance program increased, visible in the strengthening of the winter gasoline cracks, which brought the Q4 Eurobob gasoline crack swap to around $6/b toward the end of September.

"Maintenance should give some support and the US should start maximizing gasoil now -- hopefully all that together will bring some strength to gasoline," one market source said.

--Alex Van Tuyl, alex.van.tuyl@spglobal.com

--Edited by Maurice Geller, maurice.geller@spglobal.com