Total US gasoline stocks have risen by only 4 mb over the last month, but the market is focussing on what it thinks will come in the coming months. We had expected tightness in summer grade RBOB to support prices in the near term, but with high imports now set to continue for the rest of the month, and meaningful European turnarounds still several weeks away, there is little to support a bullish argument for gasoline barring a major disruption to supply somewhere.
High US refinery runs at the end of the summer have always represented a big risk for the gasoline market, but for the last two years some sort of disaster on the US Gulf Coast at the end of the summer has provided a solution by knocking out supply at the last minute. Last year it was Hurricane Harvey. In 2016 it was spills from the Colonial Pipeline.
But so far this year there has been nothing, which leaves the market with a problem given that USGC turnarounds are set to be unusually low this autumn. FCC shutdowns this month are 0.36 mb/d lower y/y, led by a massive 0.64 mb/d decline in FCC outages on the USGC, where CDU outages are lower y/y by more than 1.8 mb/d. Works rise in October, however.
This means the Atlantic basin is likely to struggle with supply for the next several weeks and shipments to East of Suez markets—where a host of refinery problems and low Chinese exports have sent timespreads soaring—should pick up in earnest. The Polar Bright, which was put on subjects to move a 90 thousand tonne cargo of gasoline from ARA to Singapore this week, the first such cargo in months, is unlikely to be the last such booking.
Chinese markets have been struggling with soaring blendstock prices of late, implying a scramble for octane. Some of the gains may be linked to the early switch by several cities and regions to China-VI gasoline specs in October rather than January 2019 as first planned. After spending much of the summer on the sidelines, Chinese refiners will raise runs in Q4 18, especially with the 0.4 mb/d Hengli refinery set to start up, but Chinese gasoline exports may only rise marginally in Q4 18 from Q3 18 levels due to strong demand and tight octane.
With West of Suez markets already overflowing with supplies, and the East unlikely to tighten further, Atlantic basin gasoline will get even weaker until turnarounds pick up. That said, this may be the last autumn for a while that gasoline markets are able to get so seasonally weak. USGC gasoline has been trading below the USGC delivered price of 1% sulphur VGO, which is a prime candidate for IMO 2020 marine fuels blending from H2 19 onwards—if the price is right.
So, what does this mean for gasoline? VGO is unlikely to be switched wholesale to the marine pool because most refineries cannot afford to sacrifice all the products yielded by their FCC units, as they are needed for upgrading some streams. But in a situation where gasoline is of low value, VGO can be placed in the marine pool. Already ‘recipes’ for compliant VLSFO have been drawn up that contain 20-30% VGO. If the market for VLSFO managed to hit 2 mb/d, VGO demand from the marine sector could easily be 0.3-0.4 mb/d. If so, this could represent a loss of 0.2 mb/d or more of FCC gasoline supply, which would translate into much larger loss in gasoline supplies, perhaps 0.4 mb/d or more.