Light brigade

Published at 10:07 8 Dec 2017 by . Last edited 11:17 22 Aug 2019.

The market has had a look at December gasoline balances and does not like what it sees. Stocks are on the rise and although refining margins in Europe have come under heavy pressure, US refineries are still going to run hard this month, particularly in PADD 2. Builds in PADD 3 will be kept under control by Mexican demand, but imports into the US East Coast may be chunky as Nigerian importers brought in far less fuel than normal in November, leaving barrels on hand in ARA for shipment to the US. PADD 1 balances for January and February also look bearish.

European refineries are running hard too, with supplies on track to be more than 0.12 mb/d higher y/y in both January and February. While the sudden weakness in refining margins in early December may raise hopes that runs will be cut, this looks premature. Margins are probably near their short-term lows amid strong crude prices and a weather-related weakness in middle distillates demand, but colder weather is on its way, at least in the US. So with supplies on the rise in the Atlantic basin, there will be a need for alternative outlets for European gasoline.

The gasoline short in Latin America is going to continue to exceed 1 mb/d through Q1 18, comparable to the short in Q3 17 and more than 0.3 mb/d greater than the short in Q1 16. Most of this will be easily met by US Gulf Coast refineries. So Europe needs West African demand to perform well to keep the stockbuilds in check. Here, a very weak period in November has laid the groundwork for a robust performance, with Nigerian imports set to pick up sharply.

Meanwhile, East of Suez markets are still showing considerable strength. Singapore gasoline timespreads have performed remarkably well in the face of seasonal weakness in the Atlantic basin gasoline markets and the threat of higher Chinese gasoline exports following the award of a fifth round of product export quotas at the start of November. The quotas themselves have been elusive, so even though some additional cargoes may trickle out, the threat of a wave of Chinese gasoline exports hitting Singapore by year-end is looking less serious than before.

Chinese exports will rise in January 2018 as fresh quotas are issued, but the government is not preparing to open the floodgates, while Asian demand outside of China will likely post y/y growth in the region of 0.25 mb/d in Q1 18. India continues to grow strongly and is thus eroding its gasoline supply surplus. The tightness in Asia will be compounded next year by a heavy round of Q1 18 refinery work in the Middle East. With Ramadan starting in mid-May in 2018, stockpiling ahead of the Muslim holy month will probably get underway in April.

For now, the market appears unwilling to look far beyond December’s builds. Atlantic basin demand is entering the slowest period of the year, so there are few compelling reasons in the short run to be long. Add in the fact that speculative length in the oil market is apparently at eye-wateringly high levels, and many, including some convinced bulls, are looking nervously for the exit door. But globally, fundamentals will improve from March onward as stockdraws begin with refinery maintenance cutting into supplies and demand rising, so a bright spring awaits.

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