Gasoline bulls will need to see significant buying in the coming weeks or they are likely to head for the doors. While scheduled turnaround work in Europe is heavy this spring, FCC maintenance on the US Gulf Coast is light. This means competition in the export market could be intense, especially if Middle Eastern buying fades. Summer RBOB cracks have fallen in recent weeks, but are higher when adjusted for the decline in RINs prices. RBOB summer timespreads are also stronger y/y and could shift lower if supply comes in stronger than the market expects.
RINs prices have come off amid a lot of political attention on the US Renewable Fuel Standard, but there has been little concrete movement on the regulatory front that would suggest big changes are likely soon. RINs prices have been trending lower since late 2017 as the Trump administration has adopted a regulatory approach that aims to minimise the cost of RINs. Trump’s favoured solution of a simpler pathway to the adoption of E15 and a price cap on RINs seems doomed as it will please no one. Court filings in the PES bankruptcy in the next week will be crucial, however, as the government’s true stance on RINs should be made clearer.
USGC inventories are 6 mb higher y/y and, with FCC work at minimal levels this year, production should remain elevated, despite softer FCC margins. This means heavy competition for European gasoline exporters in the Atlantic basin market. Supplies are on the rise elsewhere. Russia’s Kirishi refinery is now marketing upgraded gasoline for export and stocks in China are very high despite the slowdown in mixed aromatics imports. Chinese gasoline exports in March should again exceed 1 Mt despite the tax overhaul in the country.
Presently, the market is betting heavily on European turnaround activity to clean up the overhang in ARA and ensure that USEC stocks are tight heading into the spring. However, European work is not significantly higher y/y until May, while exports to East of Suez markets are likely to fade due to high supplies out of China, at least in the near term. European exporters will look to place barrels into the New York Harbor once the summer pricing season begins.
This is the big problem for the gasoline market. Demand growth is slowing, thanks to higher oil prices and an already improved employment base in the US. Unlike last year, supply growth will exceed demand growth and, given that gasoline inventories only declined modestly in 2017 despite Hurricane Harvey, a year with lower disruptions poses big problems
The difficulty in the market is compounded by growing competition from LPG in the petrochemical feed market, which is displacing naphtha from ethylene crackers. Gasoline markets now depend heavily on gasoline fundamentals for price support and with octane supplies on the rise in the FSU and China, blending economics will be favourable.
The bottom line is that we think gasoline markets are likely to struggle this summer given the relatively high stock overhang in some places, the limited curtailments in USGC output due to low planned maintenance and the slowdown in demand growth rates. Octane is hardly expensive and the production of high quality finished gasoline that can be sold into the USEC is on the rise.