European gasoline feeling the heat this summer

European gasoline margins have narrowed to near three-month lows on the back of weak export demand from the US and rising supply in northwest Europe.

Europe is structurally oversupplied with gasoline and sellers rely on exports to long-haul destinations to clear the regional overhang. Gasoline demand is typically strongest in the summer months because of the US peak driving season, but this year the transatlantic arbitrage has been largely closed, with just 1.36mn t of European gasoline sailing for the US in June, according to Vortexa data, compared with 1.72mn t a year earlier and 1.6mn t in pre-pandemic June 2019.

Lukewarm US demand, high freight costs and steep backwardation in the forward curve, where prompt prices are higher than values further out, have combined to deliver a blow to European gasoline exporters, who had reason to be optimistic about this summer after most Covid movement restrictions were lifted earlier in the year. Eurobob oxy's premium against front-month Ice Brent crude futures hit a record high of $62.68/bl in early June, as supply shortfalls emerged just as demand was expected to ramp up. But the premium has since plunged by 65pc, falling to $22.22/bl on 20 July, the weakest since 26 April.

Some traders are already looking ahead to the US hurricane season in late August as the next event that could snap open the transatlantic arbitrage. Hurricanes typically impact the US Gulf coast, a hub for refining and offshore crude production, and lingering outages there can create distressed demand for European imports. With gasoline flows to west Africa also down on the year, traders may be looking further afield to place their European supplies. Bookings to take gasoline from the Amsterdam-Rotterdam-Antwerp (ARA) area to the Mideast Gulf and even Pakistan emerged last week, although those fixtures were not confirmed and could yet fail.

Signs of rising supply in northwest Europe have added further pressure to regional gasoline margins. Market participants note a rise in blending activity in the ARA hub as prices for high-octane components cool off from record highs, making it more economical to blend finished-grade gasoline. Those record highs were reached after a collapse in naphtha prices drew much more of that product into the gasoline pool, driving up demand for high-octane components to achieve the correct specifications for finished grades.

By Robert Harvey