Risky basis

Published at 09:26 13 Jul 2018 by

RBOB gasoline is tight on the USEC, but conditions in the broader global market have hardly improved. Combined stocks in PADDs 1, 2 and 3 moved into a small surplus in early July, marking the first time that stocks have been higher y/y since Hurricane Harvey. ARA and Singapore stocks are tracking higher y/y too. The tightness in RBOB will ease as resupply from the USGC arrives and exports from as far afield as Saudi Arabia start to reach US shores.

The Saudi flows are new and potentially here to stay. Weakness in Saudi gasoline demand is turning the Kingdom into an exporter of RBOB this summer. At least one and perhaps two LR cargoes of RBOB are already set to be shipped from Saudi Arabia to the USEC before the end of summer. These probably won’t be the last cargoes either, given the prognosis for Saudi demand.

In the past, Saudi Arabia would have sold its output into the local market or nearby export markets. But Asian export outlets are fast shrinking. Octane values in Asia continue to struggle as supply has risen due to increased ethanol uptake as well as the start-up of new reformers and alkylation units in China, S-Oil’s new 76 thousand b/d RFCC in South Korea, and Vietnam’s new 0.2 mb/d Nghi Son refinery. China’s continued crackdown on the import of gasoline components has not helped matters.

In the near term, there will be a brief period of respite. Until PADD 1 RBOB stocks start to build and push down cash prices, the futures market will find a natural floor of support. From September, the picture tightens again as autumn maintenance kicks in. Already, planned FCC work in the US in October is set to be 0.47 mb/d on average, higher than the 0.41 mb/d recorded in October 2017. The turnaround schedule in Europe is heavy over September-October too.

But looking ahead just a few months to the winter gasoline season, the ease with which refiners worldwide can pump out gasoline cannot be understated. Barring a hurricane, the USGC is set to run hard over the rest of the summer and into September. And even though we expect turnaround activity to be heavy in Q4 18 and Q1 19 as refineries rush to prepare for IMO 2020, we also expect winter gasoline to be abundant due to plentiful butane supplies and new refinery capacity in Asia. This will come even as demand growth continues to slow in a high oil price environment.

Most importantly, Q1 19 will witness the ramp-up of no fewer than four large new refineries, including the giant Hengli and Rongsheng refineries in China, each rated at 0.4 mb/d, as well as Malaysia’s 0.3 mb/d RAPID project. Unlike in the past, these are gasoline machines, adding 0.3 mb/d of supplies. The return of ADNOC’s Ruwais RFCC by the end of Q1 19 will add to the pain.

The surge in East of Suez supplies could not come at a more difficult time for the market. Crude could easily average over $100 per barrel in Q4 19, which will sap gasoline demand just as the run-up to IMO 2020 ensures that refineries are running hard to maximise middle distillates output.

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