European gasoline cracks have dropped below their diesel equivalents for the first time since mid-March this week, as rising stocks put pressure on gasoline values while European diesel is finding support from tightening supply.
The European gasoline physical crack to Dated Brent was down 36 cents to $10.63/barrel Wednesday, while the crack for physical FOB ARA diesel barges versus Dated Brent gained 11 cents/b to $11.43/b.
Wednesday saw Northwest European gasoline cracks decline for the fourth consecutive session on the back of a persisting oversupply in the global gasoline complex, tepid demand and lack of workable arbitrage outlets from the net-long European market.
The front-month Eurobob gasoline crack swap fell to a three-month low of $9.65/barrel on Wednesday, from $10.20/b the previous day. They were last lower on February 29.
The supply overhang, together with news of a US gasoline stocks build, weighed on market sentiment. The US Energy Information Administration reported a 1 million barrel increase in countrywide gasoline stocks for the week ended June 3.
With persistent weakness in Asia and modest demand from the Middle East and North Africa, the US Atlantic Coast is the sole outlet for Europe's excess barrels, meaning European prices have been tracking price trends in the US, where increased imports and moderate demand have contributed to the downwards pressure on prices.
"Europe is pricing [cargoes] to keep the arbitrage [to the USAC] open," one source said.
Continued underperformance of gasoline relative to other refined products might convince producers to reduce output, according to a refiner source.
"If this continues then we will maximize diesel, which is a stronger market, over gasoline."
Another source said that refineries were "running to make diesel and for that they are producing too much gasoline with no arbitrages. Gasoline prices will have to drop quite a lot."
The European diesel market has found support in reduced resupply recently, as arbitrage flows into the region were capped by unworkable economics while the French refining sector was hit by industrial action resulting in reduced output.
Assessed at $11.43/b Wednesday, the FOB ARA diesel barge crack is well above its year-to-date average of $8.51/b.
"It's because of the strikes in France and refineries being down [both because of the French industrial action and the refinery maintenance season]," a diesel trader said, adding that the impact appeared to hit the diesel market harder than gasoline.
"Also, there is less diesel coming from the US and the East," the trader added.
