Down by the bay

Published at 10:05 11 Jan 2019 by . Last edited 11:18 22 Aug 2019.

Gasoline was so universally despised in H2 18 (and still is) that contrarians in the market are already sniffing about for opportunities to go against the tide in Q1 19. There is little chance of a bull market in Q1 19, as supply is just too high and stocks should keep building. This leaves the best hopes resting on Q2 19, as summer gasoline cracks and spreads are cheap relative to recent history. Sometimes, though, things are cheap for a reason.

With gasoline stocks soaring in ARA and the US on strong refinery runs, holding a long position in the gasoline market is going to be a challenge in the near term. Gasoline markets look to be trying to rebalance somewhat from the extreme lows suffered in recent months, yet the supply-side factors that pushed the market into massive oversupply have not all gone away.

A dire first quarter is not an insurmountable obstacle for the gasoline market but the bull case for Q2 19 rests heavily on the assumption that refinery turnarounds will be much heavier than current projections. But the evidence for a big turnaround season is thin. News that major work at ExxonMobil’s Baytown refinery will not include the plant’s FCC as many had thought should serve as a warning.

Planned FCC maintenance in North America is 83 thousand b/d y/y lower this month and down y/y through June, according to our database. European FCC work is marginally higher y/y in January and February but lower y/y by 54 thousand b/d in March and 0.13 mb/d in April. Not surprisingly, this outlook for refining has already led to talk of run cuts at a select few refiners—particularly on the US East Coast, which is perhaps the most vulnerable market in the world given the region’s reliance on gasoline markets and imported sweet crude.

Part of the problem for the Atlantic basin is that markets that formerly drew away light ends barrels from the gasoline pool in the winter are more self-sufficient than before. China’s refineries added 0.31 mb/d of reforming capacity in 2018 and may add more than 0.45 mb/d more capacity this year. The problem has been made worse by the global oversupply of naphtha.

Any progress made by the Trump administration’s plans to ease the path to 15% ethanol blends in gasoline (known as E15) by waiving pollution rules could spark another wave of bearish sentiment—even though any E15 proposal would likely get bogged down in the courts for months.

Is this another lost year for gasoline then? On balance we would say yes, but amidst the carnage, there may be opportunities. If FCC work is limited this year on the USGC, it may be because refiners have bet that doing the work in Q1 20 when the IMO transition is underway is the best bet since they will be able to sell VGO into what everyone thinks will be a hot market for marine fuel. This could wrongfoot many who expect an even worse year for gasoline in 2020 than in 2019 as slate switching by European refiners is expected to boost light ends supply next year.

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