Gasoline markets are facing a tough period that will only ease with the coming of spring. Demand is seasonally weak and refinery runs are high. Naphtha, a bright spot for light ends of late, has dimmed slightly as competition from LPG has picked up. Asian gasoline markets have plunged into contango amid slower demand from Indonesia and fears of high Chinese exports after the first batch of China’s 2018 export quotas was large and heavily biased towards gasoline.
The slide in naphtha values has nothing to do with demand-side weakness and everything to do with growing supply. The world economy continues to perform well and is carrying plastics demand along with it. But strong naphtha prices have encouraged refiners to increase supply amid renewed competition from LPG as spot availabilities of propane and butane have risen on the back of growing production in the US and the Middle East.
The gasoline side of the ledger is facing similar challenges. Despite Latin American output continuing to fall y/y due to sliding refinery runs in Venezuela and Mexico, Atlantic basin supplies are on the rise. North American gasoline supplies should rise by nearly 0.37 mb/d y/y in February due to lower overall refinery maintenance despite our expectation of modest declines in yields.
With PADD 3 monopolising Latin American supply due to logistical advantages, European exports are increasingly having to clear in the Middle East, West Africa and the US East Coast. In times of weakness in the first two of these markets, near-maximum European refinery runs means that flows into the USEC will push steadily higher. European gasoline may also have to contend with fading Chinese mixed aromatics buying and a slowdown in stockpiling demand from the Middle East once heavy Q1 18 refinery maintenance and Ramadan buying is over.
Once the weakness associated with the depths of winter passes, the Atlantic basin market will have a window of opportunity to perform, even though there are many reasons to be cautious about gasoline this year. The recent rise in oil prices means US retail gasoline prices will probably breach the $3 per gallon level this summer, which has been previously associated with slowing demand. However, we think that the current economic strength being seen both in the US and globally means that there may be a bit of room for consumers to absorb higher prices.
There are positives in the market though. Planned outages are on the rise and heavy work on the US East Coast will be followed by chunky shutdowns in Europe and Eastern Canada in April and May. With naphtha likely to improve from March on light cracker maintenance and heavy Middle turnarounds, and Nigeria buying more gasoline y/y as its economy rises, there are some strong signals for the spring Atlantic basin market. Gasoline sentiment has taken a hit but downside from here looks limited.
Ultimately, though, the key for the coming months will be turnarounds and the duration of the weakness in Asian markets. RBOB has been sensitive to downturns in the Asian gasoline market this winter and until refinery maintenance comes into the frame it will continue to nervously eye developments in Singapore.