Light Ends
Gasoline May cracks saw a 60% increase since the beginning of the war. Singapore was 140%, but has corrected downwards in the last couple of weeks.
Asian demand loss has close to matched supply loss so far and incremental cargoes from the West have helped. But US balance is tightening with a huge gap between imports and exports.
EBOB, RBOB and SING 92 cracks are already trading above 2022, at the highest seasonal level in eleven years. But summer values still need a strong rally to match 2022 values.
Asian run cuts probably have nowhere near peaked yet, delayed by drawing down crude on water. There will be less capacity to cut demand from now onwards specially during summer driving season.
The April gap was closed by heavy W-E product flows from Europe and the US, combined with price- and policy-driven demand destruction that came close to matching Asian run cuts.
Arb signals are already turning supportive: Singapore-origin barrels are close to being the cheapest supplier into Pakistan (ARA just ahead) and already the cheapest for Premium into West Coast Mexico.
Delivered mogas prices from Houston to Botany Bay is now more expensive than from Singapore since end of last week.
If E/W downtrend persists, Singapore will be soon the cheapest source into East Africa, replacing EU, which has been the best option for this outlet since the beginning of the war.
May E/W just shows trades $2.5/bbl above the pre-war levels while summer contracts are almost flat. It looks like an unjustified risk premium as EoS gasoline balance is way more impacted despite demand destruction.
Under the current circumstances, we expect E/W to find a bottom soon to the current uptrends, helped by new arbitrage arising for Singapore barrels.
A big "peace/risk-off" decline in naphtha pricing, including E/W looks wrong to us. Asian buyers seem cautious on a potential short-term deal, but June EoS balance will need to keep attracting western cargoes.
Risk to Russian export infrastructure adds more fuel to the current problem with new attacks to Tuapse during the last few weeks.
Petchem cracking demand destruction has been a major theme but naphtha supply cuts will also kick in increasingly in Asia too.
We don't think that major arbs like the Skikda – Chiba splitter arb should be this closed.
Naphtha arbitrage from MED switched to NWE as the best option during the second week of May. This dynamic should not persist for long, while the Strait remains closed.
USGC arbs still point to the East but the volume to compensate the loss of ME supply can't be covered without European naphtha volume.
Naphtha E/W to strengthen over the coming weeks under the current market environment.
