Product market sentiment retreated from the improvement seen in April. This was due mainly to a loss in the top of the barrel, which resulted from disappointing naphtha demand in the worldwide petrochemical sector and the easing of the tight gasoline market in the Atlantic Basin on news of the re-starting of some refineries. These factors, along with additional pressure from the supply side after the end of maintenance in Asia, caused refinery margins to fall across the board, despite the drop in crude prices. The margin for WTI crude on the US Gulf Coast lost almost $5 to stand around $26/b in May, on the back of losses across all parts of the barrel. The most negative developments took place at the bottom, where limited arbitrage caused the fuel oil crack to fall, while the top of the barrel remained pressured by increasing gasoline supplies from Europe.
Refinery margins for Light Louisiana Sweet (LLS) crude on the US Gulf Coast showed a slight increase of 55¢ to around $16.2/b, as the crude price weakened, affected by the reversal of the Seaway pipeline. Despite the drop in the Brent price, losses in product markets led to a decline in European refining margins in May, after having peaked in April. The European product market turned bearish as gasoline was impacted by easing supply tightness in the Atlantic Basin, with several refineries returning from maintenance or temporary closures, amid a the lack of demand for naphtha. Thus, the fuel oil crack dropped due to oversupply in the region. The refinery margin for Brent crude in Rotterdam showed a drop of $2 in May to stand at around $4.5/b.
Refining margins in Asia partially kept the recovery seen in April and although product cracks showed mixed performance, the strength at the bottom of the barrel offset the losses seen at the top. The Singapore fuel oil crack strengthened, due mainly to healthy regional demand for both power generation and bunker fuel. In contrast, cracking margins for light distillates lost momentum during the month, with gasoline and naphtha cracks both falling $4, due to increasing supply resulting from the end of maintenance in the region. Meanwhile, demand for petrochemical feedstock remained lackluster, causing Asian cracking margins in May to show a slight loss of 36¢ to stand at around $2.4/b.
Despite weak domestic demand, US refineries continued the upward trend in May with export opportunities continuing to lend support. This, along with weakening crude prices, encouraged refiners to keep run levels high. US refinery runs averaged 85.4% of capacity in May, 0.6 percentage points (pp) higher than in the previous month, despite the shutdown of some refineries in the region. Even at this refining level, distillate inventories continued falling during the month to stand at 118 mb, below the five-year average, due to high export levels from the US to the markets worldwide and as refineries shifted their focus to gasoline ahead of the driving season.
European refiners continued to operate at moderate throughputs in response to deteriorating margins, maintenance and closures. Refinery runs stood at around 77% in May. With the end of the maintenance season and some closed refineries being restarted, refiners could be reluctant to increase runs in the coming months, despite the beginning of the driving season. Asian refinery maintenance has peaked and refinery runs have been reduced from the high levels seen in previous months, falling from above 90% to around 86%. The end of maintenance could result in increased throughputs. Japanese throughputs remained at around 72% of capacity in May.
US gasoline demand recovered by around 190 tb/d from the previous month to stand at 8.85 mb/d in May, representing an increase of 66 tb/d from the same month a year earlier. US gasoline demand picked up for the first time this year showing a y-o-y rise of 1% this month. This first positive performance of demand coincided with the start of the driving season, permitting gasoline to continue to hover near recent highs and allowing cracks to recover the losses suffered at the end of April. The market continued to be reinforced by solid demand from Latin America. The supply side gave further support on news about operational difficulties in some refineries in the region. However, this situation was offset by the high inflows — more than 20 cargoes — from Europe, pressuring supply and capping the gains in gasoline cracks. The gasoline crack averaged $44/b in May, a slight loss of almost $2 from the previous month’s average. However, this shows a sharp recovery of more than $7 from the level seen at the end of April.
Middle distillate demand stood at around 3.7 mb/d in May, decreasing 60 tb/d from the previous month and marking a recovery of 110 tb/d from the same month last year. Middle distillates failed to retain the gains of the previous month as export opportunities were offset by pressure coming from the supply side on news about plans to re-start some East Coast refineries. This came amid thin diesel domestic demand, with the Ceridian-UCLA diesel fuel tracking index suggesting that trucking activity was subdued in April. Higher requirements from South America, mainly from Chile and Colombia, continued to lend support, while distillate stocks in the US fell further during the month to stand at around 118 mb, the lowest level since the end of 2008. Healthy exports to Latin America and arbitrage opportunities to Europe have limited the downside. The gasoil crack on the US Gulf Coast showed a slight loss of $1, averaging $28/b in May. Fuel oil cracks reversed the rising trend seen during the last three months due to lack of arbitrage cargoes to the Asia-Pacific and the Caribbean regions, despite prices falling along the US Gulf Coast. The fuel oil crack fell more than $5 in May to average $9/b.
Product market sentiment turned bearish as light distillates lost momentum due to news about closed refineries re-starting in the Atlantic Basin, which eased the tightness in gasoline, and with naphtha suffering from poor demand in the petrochemical sector. The tight situation in the European gasoline market eased with the return of several refineries from maintenance or temporary closures, leading to increased supply ahead of the driving season.This, along with lacklustre domestic demand, caused the gasoline cracks to partially retreat from the high levels seen in April. Nevertheless, the European gasoline market continued to be supported by strong export opportunities to West Africa and the US, helping to cap losses. The gasoline crack spread against Brent crude showed a loss of almost $5 since the end of April, to stand around $17/b during the last weeks.
The naphtha market disappointed last month and the crack plummeted to hit the lowest level seen this year — minus $15/b — due to weaker demand from the European petrochemical industry, as poor regional demand forced petrochemical units to reduce their run rates. Additionally, the strong competition of cheaper propane as an alternative feedstock continued to exert pressure, along with the lack of arbitrage opportunities to Asia causing an oversupply in the European naphtha market. Middle distillate cracks managed to keep the gain from the previous month on the back of a balanced market amid a reduction in crude prices. Despite lower demand in the region, the buying interest from the Mediterranean was relatively healthy, with higher diesel requirements from Turkey and France, which, along with ample exports to South America, lent support to the diesel market. This offset the pressure coming from the supply side with some refineries re-starting after maintenance and higher inflows from the US and Asia. Additional support came from falling ARA stocks and lower exports from Russia. The gasoil crack spread against Brent crude at Rotterdam kept the gains from last month at around $15/b. At the bottom of the barrel, fuel oil cracks lost part of the increase seen in April due to oversupply in the region, caused by higher inflows from Russian Baltic terminals and lower export opportunities from Europe. On the other hand, some support came from utilities and bunker demand in the Mediterranean, capping losses. The Northwest European fuel oil crack spread against Brent showed a loss of $1 this month, to stand at minus $4.5/b.
Cracking margins lost momentum as Asian refineries returned from maintenance along with poor light distillate demand, despite the strength seen in the middle and bottom of the barrel. The gasoline crack failed to retain last month’s rise and lost momentum due to supply side pressure. Chinese, South Korean and Indian gasoline exports began to increase, in line with the end of local refinery maintenance. Although these increasing supplies were counterbalanced to some extent by healthy regional demand — specifically from Indonesia, Pakistan and Vietnam the gasoline crack fell, given the bearish Asian light distillates market. The gasoline crack spread against Dubai crude in Singapore retreated from an average of $14/b in April to around $11/b in May.
Naphtha cracks plummeted to their lowest levels seen this year — minus $10/b — as a result of increasing pressure from high availability in the region and falling demand. The main bearish factors have been the petrochemical sector, which has been considering implementing run cuts due to the lower demand for plastics, LPG having become the cheaper feedstock, which has impacted naphtha demand, and the overall poor economic outlook. Unplanned refinery shutdowns offset the additional supply coming from several refineries returning from maintenance, thus keeping the middle distillate market well balanced. The return of several refineries from maintenance in Japan, India and South Korea has kept gasoil supplies on the rise. However, the market has remained relatively tight, boosted by an unexpected shutdown of a Vietnamese refinery and healthy, regional demand, which has remained supportive, especially from Pakistan, Vietnam, India and Sri Lanka.
The gasoil crack spread in Singapore against Dubai averaged around $18/b in May, remaining unchanged from the level seen during the previous month. The Singapore fuel oil crack strengthened, mainly on the back of healthy regional demand for power generation as well as bunker fuel. The requirements from South Korean utilities were particularly high and are expected to continue in the short term due to maintenance at nuclear power plants. Japanese utilities also added support as the country’s fuel oil requirements increased to compensate for the loss of nuclear capacity. Higher inflow volumes arriving from the Black Sea have been offset by healthy bunker demand. The fuel oil crack spread in Singapore against Dubai increased by $1 to an average of around minus $2.5/b in May.