Refinery problems and stronger-than-expected demand have tightened the global gasoline market over the last month. US inventories may struggle to return to early July levels of 239 mb over the rest of the summer if operational problems continue to bedevil refiners. While there may be little risk of US gasoline stocks falling into a significant y/y deficit given the low base from last September due to Hurricane Harvey, a heavy turnaround season lies ahead for the USEC and Midwest. So, if refineries continue to struggle this month, it will set us up for a tight October.
Hot weather in Europe and the US has played havoc with refinery operations by straining power grids and reducing the effectiveness of refinery cooling systems, forcing some refiners to limit their discharges of used cooling water into lakes and rivers due to fears that doing so would further raise the already abnormally high water temperature. We think European runs may have fallen by up to 0.6 mb/d from planned levels in certain weeks in July and August, translating into lost gasoline output of roughly 0.2 mb/d. Perhaps more importantly, there have been prolonged outages at some key European RBOB-making plants. Over the 23 weeks from 2 March, US imports of RBOB have been lower y/y 16 times, with inflows in June and July especially weak.
Even though the supply problems may be passing, the strength in demand looks like it may persist for a while longer, which is surprising. Despite the strength in the US economy, we had expected US gasoline demand to be flat to slightly lower y/y as higher oil prices took a chunk out of demand, but, at least this summer, demand looks to have grown strongly at times.
The US is not the only country where gasoline demand has strengthened. European gasoline demand rose by 28 thousand b/d y/y in May, a figure that we think underestimates the true strength in regional demand due to weakness in the German reading that is likely to be revised higher next month. Asian demand has also turned higher in recent months, registering a 0.33 mb/d y/y gain in June, aided by a recovery in Chinese demand growth. Hot weather may be helping here, by raising air conditioner use in vehicles.
The question now is can the current rally in gasoline be sustained until the switch to winter gasoline next month? Anyone holding summer-grade barrels will need to unload these sooner rather than later or prepare to blend them down to winter-grade fuel, so RBOB shipments along Colonial are expected to be robust. But with the heavy maintenance set for PADD 1 from September, winter gasoline may soon catch a bid. Dealing with the heavy turnarounds in the Midwest and the USEC, which together could cut stocks in those regions by a combined 10-15 mb could be even trickier if US butane continues to find favour in export markets.
The tightness in RBOB has clearly been exacerbated by a lot of supply issues, but it looks set to persist due to refinery outages and the limited window of opportunity to increase arbitrage supplies. Autumn will bring a big increase in supply on the USGC due to winter specifications and light maintenance, but PADD 1 could be surprisingly tight in October due to turnaround work and a steady pull from PADD 2 during maintenance. Looking ahead to the spring, the market needs to be watchful for what we expect to be a heavy turnaround season ahead of IMO 2020, especially if ARA gasoline output continues to decline with refinery upgrades in the region.