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Product market sentiment became bullish in June in the Atlantic Basin, with gasoline strengthening on the back of tightening supply sentiment, amid additional requirements for the driving season, which, along with the drop in crude prices, caused the margins to increase in that area. However, in Asia, the margins continued depressed, due to disappointing naphtha demand from the petrochemical sector and rising supplies in the region. The margin for West Texas Intermediate (WTI) crude on the US Gulf Coast showed a slight increase of 30˘ to stand at around $26/b in June, similar to the previous month, on the back of the positive developments seen mainly at the top of the barrel, with the gasoline crack strengthening.
Despite the deterioration in domestic demand, the US market continued to be supported by export opportunities to Latin America, with diesel exports hitting a record level during May. Refinery margins for Light Louisiana Sweet (LLS) and Arabian Heavy crudes on the US Gulf Coast showed a slight increase of 30˘, to stand at $16.4/b and $14.4/b respectively. The European product market became bullish, with gasoline gaining momentum over last month, as sentiment was supported by higher requirements for summer driving, mainly to the US, where the market tightened on a lack of supplies from the US Gulf Coast market. On the other hand, middle distillates and fuel oil strengthened, on the back of a tight market brought about by a drop in domestic refinery runs.
Another supportive factor was the marked contraction in crude prices, and the cracks exhibited a sharp improvement across the product slate. This allowed the European refining margin to jump up to $7.5/b, representing a gain of almost $3 on the previous month, the highest margin seen in several months. Light distillates continued losing ground in Asia, mainly due to rising supplies, with lower demand exerting pressure on the gasoline and naphtha markets, causing their cracks to fall to the lowest level this year, despite the drop in the Dubai crude price. On the distillates and fuel oil side, the Asian market remained balanced in a tighter environment, due to the lower inflows and stronger regional demand. However, this positive development could not offset the loss at the top of the barrel, and Singapore refinery margins showed a slight loss of 40˘ to average $2.0/b during June.
Refinery operations
Despite weak domestic demand, US refineries continued their upward trend in June, with export opportunities continuing to lend support. This, along with weakening crude prices, encouraged refiners to keep run-levels high.
US refinery runs averaged 92.2% of capacity in June, 4.2 percentage points (pp) higher than in the previous month and hitting a five-year record high. This was despite the shutdown of some refineries in the region. Even at this refining level, distillates and gasoline inventories continued below the five-year average, due to high export levels from the US to markets worldwide, mainly in Latin America. European refiners continued to operate at moderate throughputs, in response to deteriorating margins, maintenance and closures. Refinery runs stood at around 77% in May. During June, the marked contraction in crude prices had a hand in product market developments and the margins became healthier. However, over the last few weeks, the trend has started to correct itself and, considering that the demand-side fundamentals are still bearish, refiners are expected to keep moderate run-levels, despite the return from maintenance. The Asian refinery maintenance season continued and there was an unplanned shutdown of units in the region. This, along with the demand growth, continued slowing down developments in the region and caused refineries to reduce runs from the high levels seen in the previous quarter, falling from above 90% to around 86%. Japanese throughputs remained at around 68% of capacity in June.
US gasoline demand increased by around 80 tb/d from the previous month to stand at 8.9 mb/d in June. However, this level represented a drop of 150 tb/d from the same month a year earlier.
US gasoline demand picked up during the month to reach 8.9 mb/d for the first time this year. This positive performance coincided with the driving season and allowed gasoline to continue to hover near recent highs. The market continued to be supported by solid demand from Latin America and the summer driving season. Additional backing came from the supply side, mainly on the back of expectations of tightening supplies after news about the closing of a CDU unit in the Port Arthur refinery for a minimum of two months. However, this situation was partly offset at the end of the month by the more-than-ten cargoes coming from the attracted arbitrage from Europe, causing supply pressure and capping the gains in the gasoline cracks. The gasoline crack averaged $45/b in June, a slight increase of $1.5 from the previous month’s average.
Middle distillate demand stood at around 3.7 mb/d in June, decreasing by 20 tb/d from the previous month and marking a loss of 230 tb/d from the same month a year ago.
Middle distillates managed to maintain the margin levels of the previous month, as stronger import requirements from South America offset weakening domestic demand and rising supplies. Higher diesel requirements from South America, mainly from Chile, Ecuador and Peru, continued to lend support, while distillate stocks in the US continued falling, to hit a low level of 118 mb at the end of the month. Healthy exports to Latin America have increasingly been supporting the diesel market in the US, and US distillate exports to Latin America and the Caribbean hit a record level of more than 720 tb/d in April, according to some sources’ estimates based on monthly data from the US Energy Information Administration. The gasoil crack on the US Gulf Coast continued at around $27/b in June, a similar level to the previous month. Fuel oil cracks recovered part of the ground lost in the previous month. This was mainlym due to the decline in outright crude prices, given that domestic fuel oil demand remained moderate, while arbitrage opportunities to Asia were also currently unworkable. The fuel oil crack recovered more than $1 in June to average $11/b.
European market
Product market sentiment recovered in Europe, with the tightening Atlantic Basin product market fuelling bullish sentiment to distillates and cracks improving across the barrel. The marked contraction in crude prices also played a role in product market developments.
The European gasoline market gained momentum over last month, as sentiment was supported by higher requirements for summer driving, mainly on strong demand to export cargoes to the US, where the market tightened on a lack of supplies from the US Gulf Coast. News about unscheduled unit shutdowns at some US Gulf Coast refineries caused the Atlantic Coast to continue increasing transatlantic cargoes from northwest European refineries. Additionally, despite the weak domestic demand and lower exports to Africa, the European market was also supported by the supply side, due to the closure of a UK refinery.
The gasoline crack spread against Brent crude showed a sharp recovery of almost $3 to average around $19/b in June. The naphtha market continued weak in June and the crack fell further, mdespite the drop in crude prices, hitting the lowest level seen this year (minus $15/b on average in June), due to the lacklustre demand from the petrochemical industry. During the last week of June, the emerging demand from gasoline blenders lent some temporary support, which allowed the naphtha crack to recover by $5, although bearishness still prevailed in the European market.
Middle distillate cracks posted healthy gains over the month, in a balanced market with reduced crude prices. Despite relatively weak demand in the region, some short-term support came during the month, in light of the cuts in diesel prices across most parts of Europe, amid the typical rising demand in the summer driving season. The more positive fundamental picture was the stronger regional demand, mainly from Germany, where buying interest for 50 (ppm) diesel picked up. Additional support came from higher demand for gasoil/diesel coming from the UK, following the closure of the Coryton refinery.
Further backing came from the falling ARA stocks, as the lower runs in European refineries offset increasing exports from Russia, where the Nizhnekamsk refinery began exports of 10 ppm diesel via Primorsk. The gasoil crack spread against Brent crude at Rotterdam showed a sharp gain of $3 from the previous month to average $17.7/b in June. At the bottom of the barrel, fuel oil cracks showed a healthy performance last month, with the fuel oil market being supported by tight availability, as refiners kept supply mlimited at a time of maintenance and economic run-cuts. Further supportive factors to the market were the lack of cutter stock, a tight supply of on specification bunker-grade fuel oil in the Mediterranean and improving arbitrage opportunities to Singapore. The Northwest European fuel oil crack spread against Brent showed a gain of more than $2 this month, to stand at minus $2.3/b.
Asian market
Asian refineries increased supplies after finishing maintenance and poor light distillate demand caused cracking margins to lose momentum. This was despite the drop in crude oil prices and the continued strengthening seen in the middle and at the bottom of the barrel.
The gasoline crack continued losing momentum in June, mainly due to continued rising supplies, particularly from India and Taiwan, with lower demand exerting pressure on the gasoline crack, causing it to fall to the lowest level this year, despite the drop in Dubai crude prices. Regional demand failed to give support, as a result of the prospects of lower demand from Indonesia, as Asia´s biggest gasoline-importer reduced gasoline imports by almost 9% m-o-m to a six-month low. Additionally, Indian consumers have increasingly been shifting from gasoline to subsidized diesel. On the other hand, higher Singapore onshore light distillate stocks were also exerting pressure.
The gasoline crack spread against Dubai crude in Singapore retreated from an average of $11/b in May to around $7b in June. Naphtha cracks continued falling to the lowest level seen this year (minus $13/b), as a result of increasing pressure, because of high availability in the region at a time of falling demand. The main bearish factors were persistently low demand from the petrochemical sector, as poor petrochemical margins forced Asia-Pacific crackers to cut throughputs. On the other hand, increasing supplies from the West, India and Middle East contributed to the collapse of the Asian naphtha market.
Middle distillates continued maintaining healthy crack levels, with fundamentals remaining largely stable in a quite well-balanced gasoil market. Middle distillate cracks remained strong over the month, finding support from increasing regional demand from Australia, Sri Lanka and Vietnam, as refiners secured volumes to cover for lost output from plants going into maintenance. This stronger requirement offset the increase on the supply side from refineries returning from maintenance in Japan and South Korea, keeping the market relatively well balanced. Additional support came from the falling trend for Singapore onshore middle distillate stocks during the month. The gasoil crack spread in Singapore against Dubai averaged around $18/b in June, unchanged from the level seen the previous month. Singapore fuel oil cracks continued to strengthen, mainly on the back of healthy regional demand for power-generation, as well as bunker fuel.
The robust South Korean utility demand continued to firm, because of maintenance at nuclear power stations, and Singapore bunker fuel sales hit the highest monthly volume in May. This stronger demand could offset the reduction in the processing requirements of independent Chinese refineries. On the other hand, the arbitrage inflows into Asia-Pacific were less than the previous month, lending additional support to the market. The fuel oil crack spread in Singapore against Dubai remained at around an average of minus $2.7/b in June, a similar level to the previous month.
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