The weakening in forward gasoline cracks over the last month makes it tempting to suggest that it is time to go bargain hunting, but we still think there is little short-term upside to the market with the full weight of European supply yet to hit the US East Coast. Forward values have not fallen much relative to recent years, so there is not much upside to reward buyers today. Developments in the crude market are a further risk. Geopolitical risks, tightening supplies and limited inventories are exerting upward pressure on crude values, lifting gasoline prices into territory where demand fears will be revived. All of this is making it difficult for gasoline cracks to gain traction. But once heavy imports into PADD 1 are fully priced in, perhaps in a few weeks’ time, entry points will be more attractive.
Roughly one-third of the decline in June RBOB cracks (against June Brent) since mid-March is due to the sharp decline in the cost of complying with US biofuels rules. But most of the bad news is already priced in, so RINs prices should stabilise from here. The greater concern relates to the soft fundamentals responsible for the other two-thirds of the decline. The main problem for gasoline is supply. There is plenty of gasoline in tank (and on ships) across the Atlantic waiting to come to New York, and European turnarounds have not yet appreciably cut availability, though works are yet to peak. USEC stocks fell by less than 1 mb over March and early April, cutting the y/y stock deficit in the region around New York Harbor to less than 2 mb from nearly 8 mb in mid-February. Given that US gasoline stocks outside of PADD 5 largely struggled to draw until Hurricane Harvey hit the USGC, this should be a worry for the market.
Even the recent rally in Asian naphtha may have peaked for the short term. Timespreads hit a three-year high in early April at $8 per tonne as East of Suez condensate markets tightened significantly after Iran slashed term volumes of South Pars condensate for export clients, who have been forced to explore other feedstocks, including full-range naphtha. But cracker maintenance in Japan picks up from here, and though tight naphtha markets have given octane values a helping hand, much will depend on the ramp-up profile of the new South Pars phases due online this year. Octane demand into China will also be closely watched, but for now it is failing to materialise as new reforming capacity has been brought into service.
Heavier-than-usual CDU TARs on the USGC this month are positive, though FCC margins are hardly negative, so refiners will continue to have an incentive to operate secondary units if they can secure feedstock. Mexican gasoline production is likely rising from the very low levels posted in Q1 18. So while turnaround activity on the USGC may draw down inventories there, and perhaps even pull some imports away from PADD 1, USEC stocks are still going to be building.
To shift the short-term outlook, the market would need some significant unplanned outages. Gasoline yields will doubtless come off with summer diesel cracks becoming stronger than gasoline, but both Europe and the USGC refineries have already been driving down gasoline yields. As long as demand is not too badly hurt by rising crude prices, gasoline could start to rise in the summer once the European surplus has been run down, especially with some heavy refinery maintenance work ahead. But a few more weeks of patience are needed.