A month ago, the gasoline market was contemplating a tricky Q4 17 amid expectations that the switch to winter gasoline and surging US refinery runs would lead to a steady build in inventories as demand seasonally slowed. But then Hurricane Harvey knocked as much as 4 mb/d of refining capacity offline along the Texas Gulf Coast, including gasoline-making machines such as the 0.37 mb/d Beaumont refinery. The demand-side impact of both Harvey and Irma pales in comparison. Based on previous episodes of major hurricanes hitting the US Gulf Coast, PADD 3 gasoline demand loses are unlikely to exceed 0.2 mb/d (on average) across September.
The market has sold off from its highs as flooded USGC refineries have limped back into service, but plants in the Port Arthur area are struggling to achieve full restarts. We estimate gasoline output losses in the 30 days from 23 August along the USGC at over 34 mb (1.11 mb/d), and while these losses were more severe earlier in the month, the lingering shutdowns mean some 0.56 mb/d of gasoline output will be lost in the week from 16-22 September.
Mexican gasoline imports are poised to smash records as a crash maintenance programme at some of the country’s refineries gets underway. A 7 September earthquake also damaged the electricity supply of the 0.33 mb/d Salina Cruz refinery, which could keep it offline into early October. The greater pull from Mexico just as European refineries enter autumn maintenance is intensifying competition for waterborne gasoline, facilitating the ongoing drawdown of stocks in and around New York Harbor as European cargoes are diverted to Latin America.
Prior to Harvey, total US gasoline inventories in mid-August were comfortable at just under 230 mb, lower y/y by around 3 mb, while USGC inventories had swollen to a 5 mb y/y surplus. A month later, this cushion has not only been wiped out, but stocks are tightening quickly. The draws are impressive given disruption to gasoline export infrastructure in the USGC. Furthermore, the longer-lasting outages in the Port Arthur area are concentrated in refineries that largely supply the domestic market, whereas the Houston and Corpus Christi refineries are significant product exporters. Consequently, US gasoline inventories are set to keep falling.
Further strength in light ends comes from the naphtha market, where robust petrochemicals demand is providing competition for barrels that would otherwise go into the gasoline pool. European naphtha demand rose by 66 thousand b/d in H1 17 while higher refinery runs lifted naphtha output by 68 thousand b/d, so the hole in European naphtha balances has been little changed. Sky-high LPG prices are adding to the appeal of heavier feedstocks for ethylene manufacturers, while Asia continues to suck in naphtha at a prodigious rate.
Thus the market is set up for a tight autumn, at least until demand ebbs seasonally and refineries return from planned and unplanned maintenance. Inventories will start to recover in November and December, as refinery runs in the US peak, but planned maintenance tends to resume as early as January these days, and with work being pushed back where possible, there is a good chance that Q1 18 works will be heavy. So, while cracks may look fully valued amid expectations that inventories will recover in the rest of 2017, the market is not running away with things.