There is simply too much gasoline today and all signs point to this situation getting worse before it gets better. Refining margins are positive in every market thanks to strong diesel prices and soft light crude values which keep discounting to secure a place in refinery slates. Gasoline production is set to rise from here on higher refinery runs as autumn maintenance ends. Into H1 19, things only look worse as major new capacity expansions come on stream. The only solace is hefty refinery maintenance starting with the USGC in February. Hence the going is likely to get tougher for gasoline before it improves. Moreover, hints of weakness in the petrochemical space driven by end user destocking suggest there will be little support from naphtha either.
Most of the new gasoline supply comes from East of Suez. Malaysia’s 0.3 mb/d RAPID refinery is designed to make 0.1 mb/d of gasoline. Between Kuwait’s Clean Fuels project, which has begun commissioning, Iran’s Persian Gulf Star and the start of the rebuilt 0.13 mb/d RFCC at the UAE’s Ruwais refinery, Middle Eastern gasoline output could rise by 0.1 mb/d. In the spring, new refineries in China will only add to the pain. This all comes on top of Vietnam boosting local supplies by enough to significantly cut imports and the new RFCC at the Onsan refinery taking South Korean gasoline output above 0.5 mb/d for the first time.
There is further trouble in petrochemicals. Despite weak naphtha and LPG prices, steam cracker margins have slumped to three-year lows in Asia on a spot basis, prompting some producers to warn 2019 looks more challenging than expected. Heavier aromatics are also struggling, so this is not just an ethylene story. We understand end users (particularly in China) are destocking, spurred by the rally in flat price until recently and concerns about global growth next year. So, the tightness that characterised petrochemicals over the last few years has at least temporarily abated. Production cuts at the least competitive steam crackers will do little to help naphtha and LPG values get off the floor, and in turn these will exert a downward pull on gasoline as well.
In the near term, diesel will not provide a respite for gasoline either despite refineries returning from maintenance. Low stocks on the US East Coast, where the weather is expected to be colder than usual in late November, and the refusal of some German buyers to accept Russian-origin diesel cargoes, which has forced sellers to withdraw supplies from ARA to meet German demand, will keep supporting diesel (and hence refining margins) for now.
The oversupply in light ends is starting to look like a structural problem, and like all structural issues, the solution will be painful. Global crude oil supplies have been getting lighter as US shale oil has become the main source of growth, offsetting declining medium and heavy sour conventional crude production elsewhere. Gasoline output in the rest of the world needs to come off to help balance the US, but this looks unlikely, especially as many refineries in Europe are looking to run lighter crude slates as they need to cut fuel oil output ahead of IMO 2020.
The coming months could be very challenging for refiners most exposed to gasoline weakness, including USEC refineries and European gasoline exporters. Without supply restraint from refiners, the solution may require forcing US oil producers to produce less of the lightest crudes, likely needing both WTI-Brent to be very wide and big discounts to WTI for these grades.