Light end summary: Gasoline sinks to 2023-lows, naphtha turns east again

Quantum Commodity Intelligence – A bearish EIA report was the catalyst for a sharp correction in gasoline values this week, while naphtha outperformed relative to the rest of the barrel on improved demand in Asia and a heavy maintenance schedule in the Middle East.

Eurobob oxy E5 gasoline cracks dropped below $10/b versus ICE Brent futures in northwest Europe for the first time since the turn of the year, from nearly $30/b in the middle of last month.

That tracked an even sharper correction in the US, where RBOB-Brent cracks hit $5/b immediately after Wednesday's EIA report, around a quarter of their value just two weeks prior and their lowest since the start of 2020.

Gasoline values had been falling steadily during the transition to cheaper winter specs in September, but accelerated this week after a very bearish EIA stock report.

It put gasoline demand in the world's largest market at an eight-month low 8.01 million bpd in the last week of September. That saw stocks swell by their most all year, up a huge 6.5 million barrels and above its five-year average for the first time since April 2022.

Lower demand is likely attributed to rapidly falling wholesale prices, as retailers defer purchases until they stabilise, as well as the impact of Tropical Storm Ophelia on east coast driving demand.

ARA stocks also ticked higher this week, now running at a 6% surplus to the same time last year at around 1.3 million mt, up 19% from its five-year average.

Not all news was negative. US bank Goldman Sachs sees the sell-off as overdone amid solid fundamentals and the likelihood of yield switching towards distillates – where cracks are firmest.

"The current sell-off screens as excessive in our view given strong underlying fundamentals, stemming from gasoline's link to a robust consumer and still-robust services growth," the bank said in a note on Tuesday.

"In addition, the significant move in gasoline-heating oil ('gas-heat') spreads will allow a significant shift that further resolves the perceived deficits in the latter, while providing support to the former."

Asia

The sell-off spread to Asia, where cracks threatened to turn negative, 92 RON cargoes assessed just $1.25/b over ICE Brent crude on 4 October.

Cracks recovered to $4.02/b versus Brent by Friday likely as a result of opportunistic buying, ending the week down just $1/b.

Structure flattened through the curve, M1-M2 timespreads hitting a low of $0.70/b backwardation for the first time since January, from $1.85/b at the end of last week.

It belies a relatively bullish outlook for demand. Preliminary travel statistics during China's Golden Week celebration at the start of October put road traffic around a third higher on the same time last year.

Next month's Divali celebrations should also boost gasoline demand in India.

And a heavy maintenance schedule offers some upside, or at least a floor. Analysts FGE the Middle East pulling in extra gasoline to replace nearly 1 million bpd of capacity seen offline.

Over 50% of that reduction comes from planned works at the SATORP, SAMREF, and Yanbu refineries in Saudi Arabia.

Naphtha

Naphtha cracks posted a strong recovery this week, outperforming most other refined products on signs of tightening supply and a renewed pull from the east.

M1 paper cracks in northwest Europe bounced nearly $3/b from last week's three-month lows to just under -$12/b versus ICE Brent at Thursday's close.

And in Asia, cracks on M1 Japan swaps firmed almost $4/b in the last seven days to a five-week high -$10.48/b by Friday's Singapore close.

That helped push the east-west above $10/mt this week for the first time since the middle of August. 

Much of that is driven by naphtha's competitive advantage over propane as a feedstock, rather than any strong sign of improved cracker margins, as nap-prop spreads flipped negative this week in Asia for the first time in over a month.

That followed a surprise hike by Saudi Arabia for its November LPG contract prices this week, up for the third straight month and well above the recommended price range suggested by buyers. 

Propane values should continue to rise from here as demand for heating picks up into the winter. Against that is plentiful supply from the US – stocks at a fresh three-year high this week – although restrictions on the Panama canal have slowed exports to the east.