Gasoline is getting hit from both sides. Demand is coming under pressure from higher prices and supply is powering ahead despite weak gasoline cracks. The strength in diesel margins means that refining margins are unlikely to turn negative in any meaningful way. Refinery breakdowns might bring some temporary excitement to the summer gasoline market, but the balance of risks is firmly to the downside with rising crude prices threatening demand.
With benchmark oil prices trading more than 30% higher y/y in April, average US retail gasoline prices are already perilously close to the $3 per gallon level. In the short term, demand is likely to be relatively inelastic, as Americans need to get to work regardless of prices. US jobs growth has remained strong over the first four months of 2018, while tax cuts have helped to boost disposable incomes. We are therefore reluctant to make deep cuts to our demand forecasts and only expect a 4 thousand b/d y/y decline in US gasoline demand.
Latin America needs to be watched closely, however. Heavy pressure on emerging market currencies is amplifying the impact of rising crude prices on gasoline demand in Mexico, Brazil and other markets with liberalised gasoline prices. A 20% y/y increase in gasoline prices in Mexico is a distinct possibility in Q2 18 and in Argentina the situation is even more severe. Because of these difficulties in the biggest regional consumers, as well as Venezuela’s economic collapse, Latin American gasoline demand is now projected to fall by nearly 0.1 mb/d y/y in 2018.
To make matters worse, US gasoline supply continues to grow rapidly, in part due to a lighter crude slate as more domestic crude is processed and cheap naphtha is upgraded to finished gasoline with octane still plentiful on both the USGC and PADD 1. Octane will be even more plentiful in the winter due to surging butane production.
Supplies are growing elsewhere too. Asian supply in Q2 18 is set to jump by 0.32 mb/d, in part due to Vietnam’s new 0.2 mb/d Nghi Son refinery, but also due to the continued shift in Chinese gasoline yields towards light ends and growing gasoline output in India and the Middle East. These barrels are coming despite relatively weak gasoline cracks for this time of year. Diesel stockdraws may moderate in the summer as refineries ramp up to maximum rates following turnarounds, but the market is fundamentally out of balance and cannot afford run cuts in the summer.
The bottom line is gasoline demand growth is set to be the weakest it has been in years, while supply growth will be the strongest in a long time. The US withdrawal from the Iran nuclear deal is only aggravating the tightness in crude, so the upward pressure on oil prices will continue. The only thing bulls have left to cling to is the y/y deficit in US East Coast stocks, but with supply rising as refineries exit turnarounds, odds are that the market will struggle further.