The struggles of Atlantic basin gasoline this June should serve as a warning for the bulls. Even with refinery outages surprising to the upside, supply is too high. In the past two years, the ‘solver’ for excess US gasoline production has been a major US Gulf Coast disruption. What would happen if this does not occur? Barring a major disruption, it is hard to make a positive case for gasoline going forward, at least until H2 19 when the world’s refineries start trying to cope with the IMO 2020 rules. But even then, high oil prices will undo a lot of IMO 2020’s supply-side benefits by savaging demand.
Even with longer-than-expected turnarounds and a string of big, unplanned FCC outages, RBOB futures have plunged by nearly $3.50 against front-month Brent futures. US gasoline inventories built by 3.2 mb between early May and early June and PADD 3 stocks are on track to build this month even with the extra FCC outages, partly due to weaker LatAm demand for gasoline imports. One way that PADD 3 has managed to cope with the spate of FCC shutdowns has been to import gasoline. But as FCC outages subside, net USGC gasoline exports need to exceed 0.7 mb/d even in the summer months, compared to the average 0.68 mb/d in June and July 2017. But with Mexican refinery runs rising and sharply higher nominal gasoline prices cutting demand, the picture isn’t promising.
The problem for gasoline is clear: the USGC is making too much of it and we expect that to remain the case. Even if autumn maintenance picks up, without an act of God, PADD 3 gasoline stocks will get uncomfortably high this autumn and Q4 18 exports will have to be at least as high as November and December 2017 to keep the market in balance. Yet this was only possible due to Mexico’s refineries suffering a collective episode of paralysis last year. This portends a very weak Q4 18 for global gasoline prices, unless refinery works pick up significantly.
Gasoline demand will struggle as oil prices rise. Refining capacity is also set to grow sharply, with some 3 mb/d of new capacity due online over the next 18 months. Supply growth will once again be strong in H1 19, which we detail in this report as we launch our 2019 balances. In H2 19, the IMO 2020 shift for marine fuels will make itself felt though. At least 70% of the current 4.2 mb/d HSFO bunker market will shift to an IMO compliant fuel in 2020, widening traditional residual fuel oil and diesel differentials to perhaps as much as $60 per barrel.
The deep discount attached to traditional fuel oil will force significant run cuts at simple refineries, particularly in Europe and Latin America. Even US gasoline production should fall due to yield shifts towards marine fuel by Q4 19. Refiners may opt to increase light cycle oil production or divert VGO used in FCC units to the marine fuel pool if gasoline cracks are not sufficiently attractive.
Thus far, gasoline has not benefited at all from the IMO-induced enthusiasm that has swept diesel markets. To us, gasoline will start 2019 badly, but RBOB cracks should be more than $10 per barrel above Brent by Q4 19 and could be pushing up to $15 by end-2019. IMO represents a revaluation of all clean products, and because of the looser specifications for marine gasoil, supply will be sourced from many places, including the gasoline pool.