The bullish case for light ends in the first half of Q2 14 is largely intact. Demand continues to grow, stocks are low and turnarounds are tightening up markets worldwide. However, with distillate prices holding for now, higher European runs have eroded some of the deficit in Q2 14 and the region risks a risk a repeat in Q3 14 of the weakness seen in Q3 13 when months of run cuts were needed to wear down a supply glut, and this could blunt some of the positive story for RBOB.
US gasoline demand is likely to continue posting strong growth into Q2 14 as driving patterns return to pre-recession levels. Despite severe winter weather nationwide, US gasoline demand fell only 0.1% y/y in January, a testament to the strong cyclical upturn in demand that is at work. Beyond Q2 14, the recovery in US demand will be increasingly challenged by more difficult y/y comparisons and a return to the fore of structural themes such as rising fuel efficiency.
US gasoline stocks are down y/y in key markets, including the US East Coast as imports have fallen. RBOB stocks are very tight in most markets. Gulf Coast stocks will start rising soon as plants return from turnarounds but East Coast supplies will be challenged by the dwindling profitability of regional refineries and, so far, by a reluctance to sustain prices at a level needed to build up inventories ahead of peak demand. This raises the risk that a surge in gasoline prices will be needed to attract inflows, in much the same way as East Coast diesel prices spiked in January as a sudden rise in demand overwhelmed the region's severely eroded inventories.
Brazil looks set to step up gasoline imports in a significant way in H1 14 amid ethanol production challenges as a drought hits sugar crops. The country posted robust y/y gasoline demand growth of 0.1 mb/d in February, taking consumption to 0.77 mb/d, the second highest monthly reading ever in what is traditionally one of the low points for gasoline demand in Brazil. Additional stocking ahead of the World Cup and new regulations governing minimum inventories may be flattering growth rates somewhat, however.
Mediterranean gasoline markets have tightened considerably as North African and Middle Eastern buyers scour the region for supply while turnarounds and losses of light sweet crude supplies from Libya cut output. Meanwhile in Northwest Europe gasoline cracks have improved in recent weeks in anticipation of summer demand. Demand from West Africa, eastern North America and Asian petrochemicals producers are all pulling on European supplies.
Asian naphtha demand remains extremely strong on solid ethylene pricing while sluggish inflows from Europe earlier in the year are now resulting in limited arbitrage arrivals for May, sending petrochemicals producers scrambling for supply. Gasoline is now likely to outperform naphtha; however, as Asian markets are short of octane amid heavy turnarounds at regional FCC units and could gain further support if Chinese refiners cut runs on poor diesel export margins as domestic stocks surge. Indian exports remain lower than usual on pre-election stockbuilding, which is exacerbating the tightness in the region.