Credit crunch

Published at 09:59 11 Oct 2019 by

Gasoline bulls have come out in force as a repeat of the market’s poor performance last winter no longer appears to be on the cards. Supply-side developments are certainly supportive for prices. Unlike a year ago, a host of issues are combining to cut into octane availability in the Atlantic basin. So, while demand growth is unimpressive, the market is finding a footing.

The closure of the 0.35 mb/d Philadelphia Energy Solutions (PES) refinery on the US East Coast has increased the region’s gasoline import requirements by more than 0.1 mb/d, boosting the region’s reliance on supply from Europe. While imports into PADD 1 were very high after the PES closure, we doubt that flows can remain at such levels throughout next summer. USGC shippers are also losing up to two cents per gallon to maintain their shipping history with the Colonial pipeline at current prices. In short, the USEC market is not paying up for the supply it needs.

In addition to the PES closure, the US gasoline market faces several developments emerging at the same time. The impact of Tier 3 gasoline sulphur rules is already well understood. Tier 3 will cut octane levels as refiners will need to reduce sulphur content in US gasoline sharply, as most credits expire at the end of this year. Dwindling benzene credits mean refiners and blenders must also reduce benzene content in US gasoline next year, adding a further complication to the market. Furthermore, gasoline markets face competition from the marine fuel sector for heavy FCC feedstocks, which will boost octane values.

Tier 3 sulphur rules will force more intensive desulphurisation of FCC gasoline blendstocks while the benzene rules will force refiners to more carefully segregate benzene from reformate streams. This could also mean some untreated naphtha can no longer be blended into US gasoline. Indeed, many of the crudes run in Europe tend to be aromatic, particularly in the heavy naphtha stream. The upshot is that alkylate is going to become a more important component for US markets in 2020, both to meet import requirements on the USEC, as well as to help curb benzene levels. Interestingly, the US is not the only place where alkylate is growing in importance. The gradual rollout of E10 type gasoline throughout China as well as some EU countries means that refiners must increasingly counteract the greater volatility of ethanol by using low volatility blendstocks like alkylate and reformate. These are predominantly used in low-RVP summer blends, which already rely on higher volumes of these blendstocks.

Although the strength in octane is certainly supportive to gasoline prices, these supply-led rallies tend to be less durable than those that are driven by demand. With gasoline demand still struggling to post strong growth, the risk is that these supply-side factors are overcome by innovation in the refining sector. Demand will remain a concern, particularly with economies struggling to grow faster and recession fears dogging markets. Furthermore, there is an element of IMO-related froth in the market at present. Specification changes tend to cause the greatest volatility before they take effect. Q1 20 could bring a selloff in cracks if the market senses that marine fuel demand is manageable. With two quarters to go, summer gasoline looks fairly priced, but given the challenges on the supply front, USEC gasoline stocks look set to decline into March.

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