Atlantic basin gasoline balances are tighter than the market thinks. Heavy turnarounds in Q1 14 have swung North America back into deficit, aided by strong consumption growth. But poor diesel and LPG prices in Europe due to a warm winter and declining naphtha values are repressing European runs. With so many factors weighing on European refinery profitability, Atlantic basin gasoline prices will have to rise substantially if incremental supply from Europe is required to meet demand.
Latin America's supply requirements remain high as well, although European refiners are being displaced from Latin American markets by US Gulf Coast refiners during the winter months. Refinery turnarounds on the Gulf Coast will cut supply to export markets yet with European refining margins largely negative, inventories will be run down.
East of Suez, the Middle East has not yet become self-sufficient in gasoline despite recent refinery expansions. Indeed, operational problems and a heavy turnaround schedule combined to make a 0.39 mb/d gasoline deficit in Q1 14, almost unchanged from the 0.4 mb/d deficit in Q1 13. With Saudi Arabian refineries undergoing extensive turnarounds in February, crude oil throughputs will be low relative to installed capacity even if up substantially y/y due to the low base in 2013.
Asian gasoline markets are being supported by run cuts in Korea and Japan due to poor jet fuel prices and fears of regional diesel oversupply. The strength in gasoline is offsetting recent declines in naphtha due to the upcoming cracker turnaround season and growing competition from falling LPG prices. Indian gasoline exports will be limited in early 2014 due to refinery maintenance and stockpiling ahead of the country's elections.
European LPG prices are falling steadily due to oversupply amid a warm winter, prompting petrochemicals producers to begin backing out naphtha from crackers. Asian naphtha prices are falling in sympathy. LPG restocking in the United States may put a floor under naphtha values in the spring, however.
Turmoil in emerging markets has not yet affected gasoline demand though it is too soon to rule out any negative impact. Major gasoline consumers in Latin America appear largely insulated. Brazil's gasoline pricing policies are unlikely to be suddenly adjusted before the World Cup in the summer while the Mexican economy, and, by extension, gasoline demand, are more likely to strengthen due to its close ties to the improving US economy. South Africa, however, may prove a weak point for African gasoline demand.
Ultimately, the market will be guided by US demand. Once inventories are pared back, rising runs from Europe will be the only incremental source of gasoline supply. Accessing those supplies will require RBOB gasoline prices to push higher, much as US East Coast heating oil prices spiked to pull in fresh supply in January. But the window of opportunity will be narrow. As US demand ebbs seasonally the tide of US gasoline supply will flow back to exports. Maintaining balance will require steady reductions in European supply after mid-year, something unlikely to be achieved without some volatility.