Year of the dog

Published at 10:22 9 Feb 2018 by . Last edited 15:12 5 Nov 2018.

The turmoil in light ends markets has grown over the last month. In addition to the rout in naphtha values, the market must now deal with China’s latest crackdown on gasoline component imports, as well as the bankruptcy of the largest refiner on the US East Coast, which may upend the RINs market. Most worryingly, USGC FCC maintenance looks extraordinarily light as octane risks getting backed up in Europe if China follows through with its tax changes.

Reflecting the market mood, there is next to nothing priced into gasoline prices over problems at the 0.33 mb/d Philadelphia Energy Solutions (PES) refining complex on the USEC, which is struggling through bankruptcy. Its backers have sought to shed the company’s big RINs compliance deficit but have run into trouble. It is not yet clear if the refiner’s attempts to offload its RINs obligation onto the wider market will be successful, but regulators have already pushed back, which may mean PES will need more cash before it can exit bankruptcy. For now, the market seems content to take the whole saga as a cue to short RINs.

A more present concern in the market is how China’s new tax invoicing system will affect global blendstock flows from 1 March. China has been importing more than 0.2 mb/d of mixed aromatics for months, of which some 80 thousand b/d comes from Europe, as fuel blenders there have sought to make a profit by avoiding heavy consumption taxes on fuel imports. In theory, this game is now up. China does not really need this octane as it is adding 0.3 mb/d of reforming capacity over Q4 17 and Q1 18, so if the crackdown is successful, there will be a lot more European octane to dispose of this summer. On a global molecule basis, the fallout is likely to be neutral, as a drop in mixed aromatics imports into China will be accompanied by a drop in Chinese gasoline exports, but Asian reforming margins should strengthen at the expense of Europe, while both the naphtha and gasoline East-West spreads ought to strengthen.

The chief counterweight to all these red flags is chunky upcoming refinery maintenance in Europe, the USEC and Canada that will at least temporarily tighten the market in the spring. European CDU work is running higher y/y in April and May and FCC work, including at large gasoline exporters like ExxonMobil’s Port Jerome refinery in France is also higher y/y. But even with these big turnarounds, the market has taken fright at balances, driven by the growing worry that stellar diesel demand is going to incentivise refineries to run hard regardless of price signals from the gasoline market.

In short, there are limited reasons to be positive gasoline, but there are still a few uncertainties—namely China’s tax evasion clampdown and the ongoing PES saga—that need to be ironed out. Gasoline stockbuilds in the US should slow with maintenance and European exports will likely drop as well amid unfavourable economics. If refinery works lead to deep enough stockdraws, then there is a small chance that Atlantic basin gasoline performs in early summer, but the window of opportunity is closing. East of Suez markets will continue to perform, especially with hefty Middle Eastern turnarounds just ahead of Ramadan and possibly lower Chinese exports, and while that may continue to offer some outlets for European gasoline, the upside to RBOB and Atlantic basin gasoline in general over the next month is limited.

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