All hat, no cattle

Published at 09:52 8 Mar 2019 by . Last edited 15:36 11 Mar 2019.

Gasoline bulls have seized on turnarounds and traditional seasonal signals to bid up the market over the last few weeks, but the rally is flying in the face of serious structural problems in global light ends markets. Gasoline demand growth is sluggish in major markets and supply growth is largely unchecked. Indeed, the recent market rally has fuelled a sharp recovery in refining margins, undermining the case for stronger gasoline on the basis of weak refinery throughputs.

For summer gasoline to perform, demand must either improve or supply must be curbed. Recent trends suggest it is unrealistic to expect much from demand. US gasoline demand growth has slowed despite oil prices retreating as driving patterns have returned to the longer-term pattern of declines seen since the early 1990s. The jump in vehicle miles travelled seen in 2014-17 looks more like a blip than a change of direction. The world’s second-largest gasoline market, China, is also struggling, with car sales having fallen y/y for the first time in more than two decades and energy efficiency at the forefront of government policy. With the two heavyweights on the sidelines, any strength in the smaller gasoline markets will not move the needle.

Moreover, the supply side of the equation is deteriorating rather than improving. The world is faced with a growing imbalance between the growth in light sweet crude oil output in the US and demand for middle distillates. This year, US crude output will grow by 1.3 mb/d, representing the overwhelming majority of non-OPEC supply growth. Nearly 70% of new Permian basin production in October 2018 was condensate. These high API liquids have substantial naphtha cuts and will continue to price into refineries.

Gasoline optimists point to support from a tightening stock situation, primarily in the Atlantic basin. However, this year’s refinery work is particularly front-loaded, likely due to IMO 2020. Because maintenance has been concentrated in Q1 19, gasoline supplies will be lower y/y in March and April but are projected to be 3% higher y/y on a global basis in May, just as the traditional spring wave of US imports comes on the scene and as summer-grade blending components placed into storage over the winter start to get released into the market.

Growing gasoline production capacity in Asia is limiting the ability of European refineries to place their surplus gasoline output into markets other than the US East Coast. Moreover, high runs at USGC refineries should push more supply into international markets, depressing waterborne values. *

This sets up an interesting summer, especially as June is currently a key low point on the forward diesel curve. If diesel prices need to move into backwardation in June to keep up with demand due to low stocks, something we think is possible due to the turnaround profile in Europe and refiners’ struggles to boost diesel yields due to crude quality, then it may coincide with another round of gasoline weakness. Summer gasoline will always be stronger than winter gasoline, but this does not mean a bull run is around the corner. Structural problems don’t go away overnight.

*an older version of this report incorrectly stated that the Colonial pipeline system was planning an expansion for March 2019. We regret the error.

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