Autumn winds

Published at 09:45 11 Aug 2017 by

Despite surging US refinery runs, strong domestic demand and ample export opportunities have kept product stocks under control. Indeed, the strength in product spreads and cracks belies the continued concern in the market over the sustainability of demand growth this year. The transition to winter gasoline remains the big worry as strong diesel demand is expected to encourage high runs in Q4 17. Those fears are for later in the year both East and West of Suez.

Yet things are not uniformly grim. Europe is set for a relatively normal turnaround season that will include work at major export refineries. ARA gasoline stocks are lower y/y by 1.68 mb and strong naphtha is putting blending economics under pressure. ARA blenders produced 0.39 mb/d of gasoline over the first five months of 2017, up y/y by 50 thousand b/d. European naphtha demand has been impressive—rising by almost 10% y/y in May—with the strength driven by robust petrochemical margins and switching away from LPG by steam crackers.

East of Suez, the situation is turning less favourable after a strong summer. Singapore gasoline timespreads have reacted positively this summer, not only to bullish developments in the West, but also on good demand and a slower-than-expected ramp-up in supplies in the East. However, Chinese exports may have been lower than expected this summer amid rumours that product export quotas may be limited again in Q4 17, apparently leading refineries to trim exports this summer to preserve quotas for year-end, when net length in gasoline usually rises.

With a light turnaround slate, the ability of USGC refineries to continue trimming gasoline yields will be key. Gasoline yields have fallen y/y every month since August 2016, with significant declines recorded over the first five months of 2017. USGC refiners have already demonstrated an ability to maintain gasoline yields at optimal levels despite running a lighter crude slate. We assume a 1 percentage point drop in gasoline yields in Q4 17 from Q4 16 levels, less than half the rate of change in yields observed over the first five months of 2017.

Planned North American FCC outages for September (0.15 mb/d) and October (0.33 mb/d) are just half the levels of a year ago. US gasoline demand will fall by more than 0.25 mb/d m/m in September and by another 0.3 mb/d m/m in October, but supply will drop by far less. Flows from the USGC into the USEC will be heavy over August and September and imports should be steady y/y, so PADD 1 gasoline stocks are unlikely to decline, and by mid-September the y/y surplus could be 8 mb or more.

Thus, UGSC balances do not look significantly worse than Q4 16, especially as exports are likely to be higher y/y. PADD 1 could struggle as strong inflows from other parts of the US mean imports will need to be below 0.4 mb/d in Q4 17 to balance the market. Adjusted for RINs, the December RBOB-December ICE Brent crack has reached $5.75 per barrel—about $1.75 per barrel higher y/y but still below the $7.30 per barrel level reached by this crack in October 2016. Very high US refinery runs will rapidly erode the crude overhang and competition for feedstock should then start to limit gasoline output. The situation for the gasoline market looks challenging in Q4 17, but disaster is not around the corner, at least not yet.

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