Lightheaded

Published at 09:24 12 Oct 2018 by . Last edited 15:12 5 Nov 2018.

The carnage in gasoline markets over the last week offers a grim preview of what the end of Q4 18 will look like if refiners continue to run flat out. The fact that a major accident at Irving’s 0.31 mb/d St. John refinery, a key supplier to PADD 1, did nothing to alter the trajectory for cracks speaks volumes. Refiners are probably trying to minimise gasoline yields, but US gasoline stocks could be 255 mb or more at end of the year, which would put them 27 mb higher y/y.

Heavy imports into PADD 1 have driven up stocks to a huge y/y surplus even with local refineries down for maintenance. Weak gasoline cracks are likely weighing heavily on refining margins in the region, though the growing surplus of crude in the US Midwest has brought back crude-by-rail. USEC refineries may be running 20% or more domestic crude again, which will alleviate some of the blow but will not be enough to put these refineries on a sustainable footing.

USGC refiners face a similar challenge in that they need to be continuously expanding net gasoline exports to keep up with the pace of production growth. Even assuming USGC gasoline yields are pulled down to near recent historical lows in November and December, stocks will grow significantly unless net exports of over 1 mb/d can be achieved. Weak Mexican refinery activity will help, as will the shutdown of Trinidad’s sole plant. But elsewhere in Latin America, import requirements are softening meaning USGC gasoline will need to move further afield.

Unfortunately, other producers have similar ideas. Asian refiners are increasingly targeting Mexico as traditional importers such as Vietnam boost their own refining capacity. Mexico’s west coast market is not as easily accessed from the USGC by ship as the Caribbean market, leaving an opportunity for Asian exporters to work their supplies into this market.

European refineries have also been increasing gasoline yields, largely due to them buying more US light sweet crude. European gasoline production rose by 0.11 mb/d y/y in July despite refinery runs dropping by 0.18 mb/d y/y. This phenomenon tracks a pattern that is apparent on a global basis. Gasoline yields are on the rise worldwide thanks to a lightening crude slate. Moreover, a lot of simple refining capacity is being displaced from the market today.

Global crude runs rose by more than 0.8 mb/d y/y over the first nine months of 2018, but this obscures the fact that Latin American runs fell by nearly 0.5 mb/d y/y while European runs were down by 0.22 mb/d y/y. The market is squeezing more clean product out of every barrel of crude being fed into refineries.

If the market is oversupplied with gasoline at the start of winter, then there are going to be a lot of thorny problems to solve. Gasoline demand trends lower seasonally from here, so supplies need to fall just to keep the situation from getting worse. Ultimately run cuts will be needed, but where these will come from is not easy to see. USGC refinery work this autumn is modest and falling local crude prices plus the usual effort to minimise inventories ahead of annual tax bills mean refineries may continue to run. In the end, it may come down to diesel, which has been carrying margins. For gasoline, the best one can hope for is a long, slow slog to return to normalcy with gasoline demand at its seasonal lows.

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