RBOB Crack Spreads might be Close to Plateau
As the chart above illustrates, the seasonality of the CME Group WTI-RBOB price differential is undeniable for a straightforward reason. Demand for motor fuel in the U.S., the biggest gasoline consumer, always increases when the driving season kicks off towards the end of Q2 each year and diminishes as winter approaches. Of course, unplanned refinery outages or weather-related events can always cause sudden spikes or falls in the value of the spread. Still, the yearly fluctuation in the price differential is plain to see. The question is whether the current and the summer months' values genuinely reflect the underlying fundamentals or are out of sync.
To begin with, the end-of-March RBOB-WTI crack spread at $33/bbl is seasonally high when omitting the anomaly caused by Russia's invasion of Ukraine two years ago. The same goes for the mid-summer crack spreads. The August RBOB-WTI spread at $29/bbl seems elevated by historic standards; this differential was constantly under $20/bbl by end-July during the pre-invasion years. Plateauing domestic gasoline demand due to the growing popularity of electric vehicles could act as a brake in further gains. On the international front, the 650,000 bpd Nigerian Dangote plant has already come into service. Mexico just canceled more than 400,000 bpd of April crude oil exports because Pemex has started processing crude oil at its new Olmeca refinery. Traditional trade flows, including U.S. gasoline exports to Mexico, will be upended.
It would be tempting to conclude that crack spread values, particularly three to four months down the curve, are overvalued. It is probably the correct assumption, which comes with a caveat. Recent Ukrainian drone attacks on Russian oil infrastructure have severely impacted Russia's ability to send refined products, including gasoline, abroad. This development provides salient support for the RBOB/WTI crack spreads. Only once these attacks subside and Russian refinery operation normalizes could one reasonably expect a significant weakening in the price differential between RBOB and WTI.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
