Dusk to dawn

Published at 10:04 10 Nov 2017 by

This report marks the launch of our new European naphtha balances, supplementing our existing Asian naphtha balances.

Very strong East of Suez gasoline demand has starved the US of imports over the last several weeks, but while relief is unlikely for a little while longer, the late-season Atlantic basin gasoline rally is fading as seasonal supply and demand trends reassert themselves. The Middle East is still pulling gasoline out of Europe, but Asian markets are poised to soften as China should hike exports on new quotas while mixed aromatics buying will tail off towards year-end.

Ship fixtures from Europe have already risen sharply in response to high prices, so the very low imports that have helped keep US inventories at near three-year lows should fade. However, US Gulf Coast gasoline exports will likely remain strong as Mexican import requirements will be significant headed into the holiday season. Stocks will probably start to climb soon, as USGC gasoline output should continue to creep higher, while imports into the USEC look set to recover from mid-November, but these seasonal builds will be starting from a lower base than the market had imagined just a few weeks ago.

The builds may not last long, however. Middle Eastern refinery work, the proximate cause of much of the recent strength in East of Suez gasoline values, is slated to return with a vengeance in Q1 18. USEC refiners are also planning a heavy season of works over the quarter, while Latin American import needs are likely to remain elevated unless Pemex can perform miracles with its refineries. Mexican requirements, which may well hit a record 0.6 mb/d in December, should remain strong even though a weak peso and rising oil prices are threatening demand growth. So while the builds in gasoline stocks will come, they are unlikely to arrive before January.

Demand is the bigger question for gasoline balances next year. Indeed, should crude oil breach $70 per barrel (the level at which average US retail prices would pass $3 per gallon), a key threshold where demand in mature economies starts to come under pressure, concerns about demand will come to the fore. We think the current strength in the world economy will mean demand will be resilient, so long as oil prices do not suddenly shoot higher. Moreover, the upward trend in crude prices will likely be blunted in the New Year by the resumption of refinery work and the return to stockbuilds as demand slows seasonally.

Naphtha markets have been a solid gauge of the strength in the underlying economy as plastics demand has been robust, helping to propel the petrochemical feedstock to very strong levels. We continue to see strong naphtha demand through at least H1 18, especially as we see LPG prices rising once cold weather arrives and as global economic growth remains strong. In Asia, end-user naphtha buying is at multi-year highs. This month we are adding our European naphtha balances to the Regional overview alongside the existing Asian naphtha balances.

The bottom line is that gasoline markets will struggle to fight unfavourable seasonal trends towards higher supply and lower demand in the near term. Stocks will head higher, but having been drawn down so heavily in recent months, these builds are more than manageable. Good demand from importers will persist in Q1 18 with heavy refinery work again in the Middle East. The weakness will pass and favourable conditions will emerge for summer gasoline.

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