A great deal of worry has swept the market over the supposed weakness of US gasoline demand. We still view the softness in US demand in the first part of this year as an aberration. It is unlikely that the underlying patterns of US gasoline demand have so fundamentally changed that a major contraction is on the cards this year, particularly as the US economy is close to full employment. If anything, the trend in US gasoline demand should be towards modest growth in the coming months.
The weakness in Q1 17 gasoline demand can be attributed to various factors, but consumer behaviour and tertiary stocking patterns are likely very important. US East Coast retail gasoline prices rose more than 20% y/y in January to $2.51 per gallon, a higher average price than in any month in 2016. The same story played out in other regions. Base effects are less significant going forward, and physical market operators no longer report concerns about gasoline demand strength as they did at the start of the year.
Nevertheless, the slowdown at the start of the year has put the market in a difficult position. PADD 1 gasoline stocks were 3.2 mb higher y/y in the week ending 5 May, so the RBOB market needs imports to fall, but higher refinery runs are expected to boost European gasoline production by more than 0.11 mb/d y/y in Q2 17. If European gasoline falls in order to sustain exports, RBOB will need to price to repel imports, which could lead the market sharply lower. If demand for European gasoline from West Africa, Latin America and Asia is strong enough, however, Europe should be able to hold steady amid the RBOB weakness.
Octane is strengthening. Tier 3 gasoline rules in the US and renewed mixed aromatics buying into China have clearly been supportive. The lack of any identifiable progress on China’s consumption tax reforms has set off a flurry of fixtures to ship at least 0.4 Mt (0.11 mb/d) of reformate and other gasoline blending components from Europe to Asia in recent days. These barrels would otherwise have gone to the New York Harbor, or even the USGC, so the resumption of exports is significant for the entire Atlantic basin.
Even excluding the return of Chinese mixed aromatics buying, Asian gasoline markets have perked up after struggling for much of the year so far despite ostensibly bullish fundamentals. But much of the weakness can be attributed to one-off factors that are now behind us. Heavy buying by Saudi Arabia ahead of Ramadan has helped turn the market around in the last couple of weeks, and the prospect of strong Vietnamese import requirements this summer may support the market for a bit longer, even though the late H2 17 picture is murkier.
Demand is improving in key markets, including Europe, but the problem is that the supply side is also ramping up. A compromise 500 ppm specification is being talked of for Nigeria, which would limit the pull on high-quality European barrels. If Nigeria sticks to its plan to implement a 150 ppm specification in July and China continues to allow mixed aromatics to flow into the country untaxed then the market will be in better shape. Without help from Nigeria, the best-case scenario for the bulls might be a late summer rally, especially if crude markets finally perk up and hold back refining.