Over the last few years, product markets experienced a sharp downward correction in September which exerted adverse pressure on the entire petroleum complex. However, this year this trend has been muted significantly due to heavier seasonal maintenance in the Atlantic Basin and storm-related concerns which picked up in the second half of September, raising the risk of damage to refineries and provided support for product markets and slowed the decline in refining margins.
As shows, refinery margins for the benchmark WTI crude at the US Gulf Coast declined slightly by 79˘/b to $7.41/b from $8.20/b in August. In Europe, refinery margins for Brent crude oil at Rotterdam dropped a marginal $0.11/b to reach $5.01/b from $5.12/b last month. The heavier refinery maintenance schedules in October may provide further support for Atlantic Basin refinery margins in the coming weeks.
In Asia, the market followed the same trend and refinery margins for benchmark Dubai crude oil fell by $0.11/b to $2.98/b from $3.09/b in the previous month. In Asia, refinery margins have come down a lot in recent months, but are likely to improve over the next months on the back of stronger distillates.
With the approaching winter season, the current neutral momentum of the product markets may improve further providing support for refinery economics and crude prices. However, the major wild cards would be weather conditions, particularly in the Atlantic Basin, and the refinery operation level in the US.
At the end of the driving season and prior to the peak heating oil season typically comes a shoulder season when refiners, particularly in the Atlantic Basin, carry out their autumn maintenance schedule and switch the refinery operation mode in favour of middle distillates. This year maintenance schedules look relatively heavy in the US and Europe. If the oil industry faces another round of outages in the next months as experienced earlier this year, market sentiment may shift to product market developments rather than crude fundamentals.
These developments have so far slightly reduced the US refinery utilization rate by 1.6% to 89.7% in September from 91.3% in August. In Europe, the refinery utilization rate increased a marginal 0.7% to 86.6% in September from 85.9% in the previous month. In Asia, the situation was relatively different, as the refinery operation level improved in most countries, but it slid significantly in Japan. The Japanese refinery utilization rate slipped to 81.8% from 90.5% in August.
Due to the peaking of the autumn refinery maintenance schedules in October, refinery utilization rates are expected to decline across the globe next month, particularly in the Atlantic Basin.
Storm-related concerns and lower gasoline stocks could not overwhelm the impact of seasonal factors on the gasoline market and encourage market players to keep their long positions in the gasoline market. This situation has resulted in the fact that the gasoline prices both in the physical and the paper markets plummeted and the crack spread of premium gasoline against benchmark WTI crude oil plunged to about $9/b on 5 October from about $19.62/b in early September. Seasonally weaker demand and potentially higher imports from the other side of the Atlantic and Asia Pacific are likely to limit the bullish momentum of the gasoline market in the coming months.
Despite the bearish movements in the gasoline market, middle distillates gained ground and both gas oil and kerosene crack spreads versus benchmark WTI crude at the US Gulf Coast stayed above $13/b. More typical weather conditions this winter would provide further support to distillate components and crude prices in the near future. Such perception has also encouraged market players to increase their net long positions in the heating oil futures market.
A combination of pre-winter buying from utility plants and the shipping industry, along with more arbitrage cargoes to Asia, boosted fuel oil demand in September versus the same period last year and provided support for different grades of fuel oil in absolute terms. However, due to high stocks and the relatively low price of natural gas as a major substitution for fuel oil, it is most unlikely that the current situation of fuel oil market will be sustained in the next weeks.
As projected in the last MOMR, the bullish developments of the European gasoline market in the latter part of August did not persist into September, as falling US gasoline demand along with relatively high freight rates has undermined transatlantic arbitrage economics and hit the European market. Following these developments, premium gasoline prices plummeted and its crack spread against benchmark Brent crude in Rotterdam on average narrowed to nearly $14.90/b from $17.94/b in August. Current conditions may weaken further in the next weeks due to sluggish regional demand and as gasoline stock levels might reach the range of the five-year average.
Despite the bearish momentum for gasoline, the European market sentiment for the middle of barrel components especially for low-sulphur grades appears strong. These circumstances have recently been enhanced due to refinery outages in France, Sweden and reduced exports from Russia through the Baltic. The projected autumn refinery maintenance schedule in October may carry the present tightness over into next month, supporting middle distillate margins. The low-sulphur gasoil crack spread versus benchmark Brent crude in Rotterdam — which acts as barometer of market sentiment — reached about $20/b in the last week of September.
The European fuel oil market for low-sulphur grade appears poor due to lower regional utility demand and lack of an arbitrage outlet to the US. The low-sulphur fuel oil crack spread against Brent at Rotterdam plunged to minus $19.57/b in the last week of September from minus $9.41/b in the same period of the previous month . But high-sulphur grades fared better as solid regional demand for bunker fuel and limited Russian supplies from the Baltic supported prices. Similarly, straight-run grades still remained strong especially in the Mediterranean area.
Higher demand from Indonesia and Vietnam along with lower exports from China could not cap the downward trend of the Asian gasoline market which was affected by the lack of arbitrage opportunity to the US and other seasonal factors. The gasoline crack spread versus benchmark Dubai crude in Singapore fell to $6.95/b in the last week of September from $10.58/b in the same week of the previous month.
Asian market sentiment for naphtha remained also weak due to higher exports from India and lower regional demand, as a result of the continuation of the maintenance schedule in petrochemical plants. With the approaching end of the maintenance season, the current situation in the naphtha market may improve, lifting naphtha prices in the latter part of this year.
As for middle distillates, market players focused their attention on the gas oil market, particularly for low-sulphur grades. Higher demand from India, Indonesia and Vietnam along with arbitrage opportunities to the Middle East and Europe provided sufficient support for the gasoil market so that even the increase of the corresponding benchmark Dubai crude by $6/b to $73.36/b in September from $67.36/b last month could not undermine the gasoil crack spread versus Dubai crude in the Singapore market. The gasoil crack spread in Singapore remained strong at around $20/b in September.
The lack of arbitrage opportunities to the US West Coast weighed on the Asian jet/kero market and its momentum was unchanged compared to the previous month. However, a fall in Japan’s kerosene stocks may support the jet/kero market in the next few weeks.
The Asian fuel oil market for low-sulphur grades lost a part of its strong momentum in the previous month due to high availability and natural gas stocks in Japan. However, it still looks fundamentally strong largely due to lower exports from the Middle East and less arbitrage cargoes from Europe. These developments have recently narrowed the high sulfur crack spread to minus $14.75/b from minus $16.20 in the middle of September.