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Gasoline stock build in the US and the weakening of the distillates market have exerted pressured on product market sentiment and undermined refining economics in the US and Asia. Due to continued slow demand resulting from the ongoing economic crisis and comfortable products stocks as well as increasing spare refining capacity across the globe, a recovery from the current bearish momentum in the products market is not expected in the coming driving season.
Furthermore, surging crude cost resulting from speculative activities and returning commodity investment funds into the market may lead to lower refining margins in the coming months. Such circumstances would encourage refiners to cut runs and put more pressure on crude fundamentals in the future.
Although boosted in February by gasoline stock draws and refinery glitches, US refining margins significantly lost ground in March., refining margins for WTI crude in the US Gulf plummeted to $3.58/b in March from $10.64/b in February. In Europe, the market situation was slightly different as export opportunities to the US and Asia lifted light and heavy product prices. In line with these developments, refining margins for Brent crude oil in Rotterdam rose to $1.53/b in March from minus $2.48/b in the previous month.
In Asia, limited export opportunities for middle distillates along with relatively poor performances of fuel oil and gasoline markets negatively affected refining margins. Refining margins for Dubai crude oil in Singapore dropped by $2.3/b to $0.61/b in March from $3.91/b in February. Starting maintenance schedule may lend support to margins in Asia over the next months, but it is not expected to last long.
Refinery operations
Refinery maintenance usually takes place in spring or autumn, prior to the driving and heating seasons. In the Atlantic Basin, major refinery turnarounds typically carry on in spring before the beginning of the driving season. Due to slowing refining margins in the latter part of 2008, refinery maintenance started earlier than usual this year.
The refinery utilization rate in the US is still below the typical seasonal level, but rose by 2.9% compared to the previous month to reach 83.9%. In Europe, refinery utilization rates declined marginally by 0.5% in March to reach 83.3%. In Asia, refinery throughputs also followed suit, decreasing from the previous month. Refinery utilization rates in Japan slid by 1.8% to 83.8%.
US market
The switch in refinery mode to gasoline output, increased gasoline imports and relatively sluggish demand led to a build in gasoline stocks, capping the earlier bullish momentum of the gasoline market.
Following these developments, the gasoline crack spread in the US Gulf against WTI crude narrowed to $12/b in late March from nearly $15/b earlier in the same month. However, it is worth noting that, despite bearish developments in product market fundamentals, the gasoline futures market has improved recently, as the return of commodity investment funds to crude and gasoline markets lifted the gasoline spread in early April. Upon completion of present refinery maintenance and an increase in product output, gasoline market sentiment is expected to ease further.
Ample inventories dampened the middle distillate market in the US, but export opportunities to Europe and South America amid seasonal demand from the agriculture sector have trimmed the downward trend of the distillates spread. Due to the continuation of the ongoing economic crisis and its adverse effects on middle distillate demand, the current bearish sentiment of middle distillates is not expected to change significantly in the near future.
The US fuel oil market performed better and remained strong in March, as demand outpaced average domestic production and encouraged traders to import more fuel oil from Europe. The current situation of the fuel oil market may change in the next months as refiners return from maintenance and increase outputs. As a result, the persisting discounted spread of low sulfur fuel oil against WTI crude may widen further in the coming months.
European market
Limited supplies from regional refineries amid increasing seasonal maintenance, temporary strikes in
France and the narrowing arbitrage window to Asia have stemmed the downward trend of the European middle distillates market. Following these movements, the gasoil crack spread versus Brent crude oil recovered from $6/b in early March to about $13/b in early April. Diesel supplies on the Mediterranean market has remained tighter than in the rest of Europe. The present circumstances of the European distillates market may ease over the next months as refiners returned from maintenance.
The gasoline market in Europe benefited from low regional inventories, export opportunities to the US and Middle East as well as positive developments in the US futures market. The current situation of the European gasoline market is expected to change unfavourably over the coming months as refiners’ return from maintenance and transatlantic arbitrage opportunities are limited. The gasoline crack spread against Brent crude remained around $8/b in March.
European fuel oil prices continued to strengthen along with crude oil in March, but fewer export opportunities to Asia and low regional inland demand has exerted downward pressure on the fuel oil crack spread. A low sulfur fuel oil crack spread to Brent crude in Rotterdam widened to minus $11/b in March from around minus $7/b in the previous month. The European fuel oil market situation has improved lately due to limited Russian exports and increasing shipments to the US, thus clearing prompt regional supplies.
Asian market
Despite the bullish developments for naphtha, the Asian gasoline market lost ground due to lower demand from Indonesia and Vietnam. These circumstances forced regional refiners to cut throughputs earlier than usual. The gasoline crack spread against Dubai crude oil in Singapore plummeted to around $7/b in March from above $11/b in February. The naphtha market sentiment also eased slightly in the latter part of March amid the arrival of huge arbitrage cargoes from Europe. However, the Asian naphtha market is expected to remain relatively strong in the shortterm, as petrochemical units emerge from maintenance and boost cracking operating rates.
The middle distillate crack spread in Asia has not improved significantly compared to previous months due to less arbitrage opportunity to Europe and lower demand by Indonesia. The recent rally in the distillate crack spread is likely to be temporary, as the region’s balance does not look tight amid persisting slowing economic activity. Considering the bearish prospect for Asian economic growth, middle distillate market momentum may ease further in the near future and weigh down the gasoil crack spread versus Dubai crude. Apart from gasoil, jet fuel oil prices also came under pressure from ample supply and weak regional demand.
With regard to fuel oil, the Asian market demand remained muted due to a slump in regional trade and manufacturing activity. Demand for utility and power generation continues to fall. However, the prospect of tighter supplies from the Middle East and South Korea as well as fewer arbitrage barrels landing in Asia, is keeping the fuel oil market relatively well-supported. The high sulfur fuel oil crack spread versus Dubai crude narrowed again to minus $5.50/b in early April. In the second quarter, the Asian fuel oil market is expected to be supported by reduced regional supplies due to annual refinery maintenance.
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