Product market sentiment remained relatively healthy in July in the Atlantic Basin, with distillates continuing to strengthen on the back of tightening supply, while fuel oil weakened on lack of demand. The positive performance of distillates allowed the margins to remain healthy, despite weaker fuel oil and the increase in crude prices. In Asia, refinery margins showed a sharp recovery, on the back of rising demand in light distillates and tight sentiment, due to refinery shutdowns and heavy maintenance in the region. The margin for West Texas Intermediate (WTI) rude on the US Gulf Coast showed a light decrease of 50¢ to stand at around $25.5/b in July.This was mostly on the back of weakening product cracks, which came under pressure due primarily to higher crude prices. However, the loss in the margin was limited by healthy middle distillates offsetting the fall in fuel oil cracks, as a consequence of the decline in bunker fuel demand. Despite the deterioration in domestic demand, the US market continued to be supported by export opportunities to Latin America, with distillate exports remaining on the rise and inventories continuing below the typical average. Refinery margins for Arab Heavy crude on the US Gulf Coast showed a drop of $1, to stand at $13.3/b, due to the disappointing performance of fuel oil.
Product prices rose on tightening supply and firmer demand, with the exception of fuel oil, which weakened worldwide due to lower demand, while middle distillates remained stable and healthy on the back of a tight environment in the region. However, the strengthening in products was offset by increasing crude prices in Europe, thus weighing on refining margins, which hardly managed to maintain the levels reached last month, dropping by 10¢ to around $7.4/b; however, this was the second-highest level seen in several months.
Singapore refining margins posted an impressive performance to reach the highest level since February, mainly on the back of positive developments across the light and middle distillate spectrum. At the top of the barrel, the gasoline crack witnessed the highest gain, as sentiment was lifted by healthy demand amid tightening supply. These developments caused cracking margins to recover momentum, despite the rise in crude oil prices and the weaker fuel oil performance, and allowed Singapore refinery margins to show a sharp gain of $2.5 to average $4.5/b in July.
Despite weak domestic demand, US refinery runs hit a five-year record high in July, with export opportunities continuing to lend support. This, along with healthy margins, encouraged refiners to keep run-levels high. US refinery runs averaged 92.5% of capacity in July, 0.6 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, distillate and gasoline inventories continued below the five-year average, due to high export levels from the US to markets worldwide, mainly in Latin America and Europe.
European refiners continued to operate at moderate throughputs, in response to deteriorating margins, maintenance and closures. Refinery runs stood at around 78% in June. Since June, a relative tightening of Atlantic Basin balances has allowed margins to become healthier in Europe, despite the increases in crude prices. However, considering that the demand-side fundamentals are still weak, refiners are expected to keep moderate run-levels, despite some refineries in the region returning from maintenance and others restarting after having been shut down. The Asian refinery maintenance season continued and there was an unplanned shutdown of units in the region. This situation made the market tighter, in addition to increasing light and middle distillate demand supporting the market, which allowed margins to recover. This could encourage refiners to increase their runs in the coming months. Japanese throughputs remained at around 74% of capacity in July. However, the sector suffered unscheduled shutdowns in two refineries, which could affect next month’s refining level.
US gasoline demand decreased by around 160 tb/d from the previous month to stand at around 8.8 mb/d in July. This level represented a drop of 200 tb/d from the same month a year earlier. US gasoline demand picked up in June, most likely in anticipation of increased travel over the Independence Day holiday and with the summer driving season under way. However, during July, domestic demand dropped and, on a y-o-y basis, was down by more than 2%. The gasoline crack witnessed a slight loss, partly attributed to developments with crude, as the gasoline market continued to be supported by solid demand from Latin America, and inventories remained below average — although showing some increase during the month — despite rising refinery runs in recent months. The gasoline crack averaged $45/b in July, a slight loss of $1 from the previous month’s average.
Middle distillate demand stood at around 3.5 mb/d in July, decreasing by 260 tb/d from the previous month, but remaining at a similar level from the same month a year ago. Middle distillates continued increasing their margins, despite crude prices rising during July. Domestic diesel demand was relatively healthy last month, fuelling positive sentiment in the market. Good ongoing import requirements from South America also contributed towards this development, mainly from Ecuador, Argentina and Costa Rica. Additionally, Chile and Peru were shipping cargoes from the US West Coast. Arbitrage opportunities to Europe and inventories, which remained below the latest fiveyear average, lent additional support to the market. The gasoil crack on the US Gulf Coast gained almost $1 to stand at around $29/b in July.
Fuel oil cracks lost the ground recovered in the previous month. This was mainly due to the decline in demand amid increasing crude prices. At the bottom of the barrel, fuel oil put on a weak performance over the month, with domestic demand falling, as bunker fuel demand was low on the US East Coast. In addition, export demand was poor, with limited fresh fixtures to Asia-Pacific from the Gulf Coast or Caribbean. The fuel oil crack averaged $8/b in July, losing $4 from the previous month. Fuel oil market participants continued to be concerned about the impact of the North American Emission Control Area, which would come into effect on 1 August and require vessels sailing within 200 nautical miles of the coast to burn fuel with a maximum 1% of sulphur, instead of the previous quality of 3.5%.
Product market sentiment weakened at the top and bottom of the barrel due to weaker demand, and their cracks were reduced further due to higher crude prices. The exception was for middle distillates, which continued stable and healthy on the back of a tightening situation. The European gasoline market lost part of the momentum gained in June, with the continuing support from transatlantic exports being outweighed by reduced exports to Africa, as well as poor domestic demand. Supply fundamentals remained fairly supportive and were able to cap losses, as the shutdown of the Coryton refinery in the UK helped tighten supplies in the region. The gasoline crack spread against Brent crude showed a loss of almost $2, to average around $18.5/b in July. The naphtha market continued weak in July, with European petrochemical demand slipping, since the market had been over-supplied and crude was maintaining its rising trend in Europe.
Middle distillates in North-West Europe managed to hold the healthy levels gained in June, with cracks remaining basically unchanged, despite the increase in crude prices. In spite of relatively weak demand in the region, some short-term support remained during the month, in light of the typical rising demand in the summer driving season. The more positive fundamental picture showed stronger regional demand, mainly from Germany, Greece, Israel and Turkey. Additional support came from rising exports to North Africa and the Middle East, with Saudi Arabia increasing imports over this period to meet summer utility demand. The supply side started to exert pressure, due to increasing exports from Russia. However, the market was balanced and became relatively tight, owing to a problem with a hydrocracker at Pernis refinery in Rotterdam, as well as the shortfall following the closure of the Coryton refinery. The gasoil crack spread against Brent crude at Rotterdam remained at around an average of $19/b in July, similar to the previous month.
At the bottom of the barrel, fuel oil cracks failed to outperform crude, due to pressure from lower demand for high-sulphur, straight-run fuel oil, with Morocco´s Mohammedia refinery ceasing imports and the Coryton refinery having shut down. Increasing supplies from the Baltic, with ARA fuel oil stocks rising amid weaker traded volumes in the Rotterdam barge market and arbitrage opportunities to Singapore becoming difficult, exerted further pressure and caused the fuel crack to fall. The North-West European fuel oil crack spread against Brent showed a loss of $2.5 in July, to stand at minus $3.5/b.
Asian refineries reduced supplies due to maintenance and additional unscheduled shutdowns, tightening the market amid strong distillate demand and causing the cracking margins to recover momentum, despite the rise in crude oil prices. The only product to weaken was fuel oil, due to over-supply in the region and lower demand. The gasoline crack recovered the ground lost during June, as sentiment was lifted by healthy regional demand, mainly from Asian importers: Indonesia´s Pertamina had higher requirements; in Pakistan, supply shortages in natural gas contributed to higher gasoline imports; and Sri Lanka had to cover domestic shortfalls during maintenance at its Kelaniya refinery. Additional support came from the supply side, due to the unexpected Chiba refinery shut-down and the closure of the Mizushima refinery in Japan, while Thailand was expected to import cargoes following the Bangkok refinery shut-down.
The gasoline crack spread against Dubai crude in Singapore recovered $2 to average $11/b in July. Naphtha cracks developed similarly, recovering some ground, since demand side fundamentals were supportive, with firmer buying interest from South Korea because of higher petrochemical demand. Supplies became tighter, with naphtha exports from India decreasing, as Indian refiners were directing naphtha to the more lucrative gasoline pool instead.
Middle distillates continued maintaining healthy crack levels, with fundamentals remaining largely stable in a relatively tight gasoil market. Support for the gasoil crack stemmed from increased buying interest from the Philippines, Vietnam, India and Sri Lanka. Supply side fundamentals also provided support, with refinery maintenance at the Shell refinery in Singapore contributing to lower gasoil volumes, along with another refinery shutdown in the region causing the market to tighten and Singapore middle distillate stocks to fall. Further support also came from higher Saudi Arabian import requirements. The gasoil crack spread in Singapore against Dubai averaged around $21/b in July, gaining $1.4 from the previous month. At the bottom of the barrel, the fuel oil crack experienced a loss, most likely due to lower regional demand. Limited demand from the bunker sector and independent Chinese refiners weighed on the fuel oil market, offsetting buying interest from utilities in South Korea and Pakistan, while Japanese oil imports fell. Meanwhile, supplies remained ample in the region, with rising arbitrage arrivals contributing to the widening discount on Singapore’s fuel oil. The fuel oil crack spread in Singapore against Dubai dropped $2 to average minus $3.5/b in July.