Bumps on the road

Published at 09:50 7 Dec 2018 by . Last edited 11:18 22 Aug 2019.

Gasoline markets worldwide remain beset by oversupply and increasingly demand worries are cropping up in our discussions with market players. Despite strong employment and tax cuts, US gasoline demand has posted two consecutive quarters of y/y declines for the first time since 2012. Demand is also weak in other key consuming countries. Saudi Arabian demand is poised to contract y/y as the expatriate workforce shrinks, while Chinese car sales could post their first y/y decline in decades. The softness in gasoline demand comes as steam cracker margins have also come under heavy pressure despite weakness in naphtha and LPG prices.

US refiners report ultra-light shale crude continues to be priced competitively despite slumping gasoline, perpetuating the oversupply. US gasoline output has risen y/y despite demand falling. Traditional export markets are also saturated. While Mexican gasoline output has continued to decline due to the deterioration of its refineries, gasoline demand has also fallen modestly there, so the overhang on the US Gulf Coast has grown. Growing US light crude exports to Europe are also helping to boost gasoline output on the Continent. Despite European runs falling by 0.1 mb/d y/y in the year through September, gasoline output has risen by 43 thousand b/d.

A potentially lengthy outage at Irving’s 0.3 mb/d St John refinery could offer some relief to USEC prices this winter, though we expect European gasoline exports to PADD 1 to rebound from their late November lows as several gasoline-exporting refineries in NW Europe return from works.

Asian supplies have also risen, with new gasoline-making units in China and South Korea pressuring the market. Middle Eastern output will rise in 2019 as the RFCC at the Ruwais refinery comes back into service after a lengthy outage and Kuwait’s Clean Fuels Project ramps up. Three new refineries will also add up to 0.3 mb/d of gasoline supply in Asia-Pacific next year.

Help from the supply side may take a while in coming. Even though reported planned refinery work in H1 19 is still relatively low, market expectations are for turnarounds to be significant on the USGC starting in late January, and in Asia and Europe in Q2 19, largely because there is a strong belief that refiners will seek to keep planned work to a minimum in H2 19 and H1 20 because of the IMO 2020 transition to lower-sulphur ship fuels on 1 January 2020.

The gasoline problem, therefore, looks increasingly structural. Part of the issue is the growing substitution of medium and heavy crudes, which are in decline in many parts of the world, for lighter grades. Without increased investment in medium crude production, the supply side of the market will not be able to fix this issue. What is really needed is demand growth. But as we have seen, there are probably more reasons to doubt the durability of demand growth than to hope for an acceleration in consumption that rebalances the market.

Gasoline may eventually get some help from the IMO 2020 shift in ship fuel sulphur content, which will occur towards the end of 2019. Marine gas oil and compliant very-low-sulphur fuel oil will pull VGO out of the gasoline pool, tightening octane balances and helping gasoline cracks recover. But this really will not start to influence gasoline markets until Q4 19. So already 2019 looks like it could be a write-off for gasoline.

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