Eastern promises

Published at 09:15 13 Oct 2017 by

Gasoline markets have struggled despite the punishing blows from hurricane season. The market has been bracing for big stock draws in the US after Hurricane Harvey removed 30 mb of gasoline output but the reality has been more muted. Between 25 August and 29 September, gasoline inventories in PADDs 1-3 dropped by just 14 mb while ARA gasoline inventories declined by less than 1 mb.

The slowdown in demand in Florida caused by Hurricane Irma, as well as temporarily reduced exports from the USGC, will have eased the blow from the supply shock. Hurricane Maria diverted supplies away from the Caribbean to Florida as well. But with refineries returning and set to run hard, how much of this matters anyway? Seasonally, gasoline should be struggling now as demand falls and refineries ramp up from autumn maintenance. 

But these are known quantities and presumably already priced into the market. Gasoline cracks are still stronger on a seasonal basis than they have been for several years and timespreads suggest barrels are not always so easy to come by. The key point is that the US will be building gasoline stocks in the final months of the year, which is normal, but doing so from a substantially lower starting point than last year.

For now, naphtha and East of Suez gasoline markets are holding up, and with exports to the US set to drop, the downside to prices may be limited. Despite the pervasive bearishness west of Suez, Singapore gasoline timespreads have held up well, driven by growing import requirements in Indonesia and Malaysia. Fears of high Chinese gasoline exports in Q4 17 due to resurgent inflows of mixed aromatics have also subsided due to restrictive export quotas for the rest of the year and even if there is a fifth round of quotas awarded, we believe it will be small.

Further uncertainty on the supply side of the market comes from the Middle East, where heavy refinery maintenance is coinciding with production problems at Iran’s South Pars gas field that seems to have cut into runs at the 0.12 mb/d first phase of Iran’s Persian Gulf Star condensate splitter. Strong Iranian demand and work on an isomerisation unit at the Tehran refinery this month have compounded the tightness.

The strength in eastern gasoline mirrors that of naphtha, which is being supported by rampant LPG prices. US propane production is still failing to keep pace with the country’s export capacity and stock levels in key Asian consuming markets have sunk into a y/y deficit. Consequently, Asian spot LPG values are trading above naphtha, keeping the latter the preferred feedstock. WAF gasoline demand is also set to swing higher over November and December.

The market should also beware dismissing Harvey as a thing of the past.  Already US refinery maintenance between February and April of next year looks like it will be heavy given the number of Harvey-related deferrals. The spring will also bring with it some of the heaviest FCC works on the US East Coast in years. The overall gasoline market is seasonally pessimistic, and timespreads are already reflecting tight prompt stocks, so RBOB might look bereft of opportunities—but plenty lurk around the corner for next spring.

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