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US Product Markets and Refinery Operations – November 2012

Source: OPEC 12/8/2012, Location: Europe

US gasoline demand stood at around 8.6 mb/d in October, dropping 80 tb/d from the previous month and down by around 20 tb/d from the same month last year. The demand picture in the US remains disappointing, with the Energy Information Administration (EIA) showing the requirement for motor fuel on a four-week average basis at 8.6 mb/d, the lowest level since April. With the end of the driving season and refinery maintenance, the main supporting factors have disappeared and with them the bullish market expectations.

This has caused the gasoline cracks to post a sharp decline, falling to the lowest level seen in the last six months. The gasoline crack decline marked a long-awaited downward correction from previously very high levels. However, some factors capped losses, such as demand from Latin America, mainly with Mexico´s appetite for gasoline remaining healthy, while Brazil`s imports are expected to fall, in line with the upcoming increase of ethanol blending into the gasoline pool from 20% to 25%.

Another factor limiting losses was the support coming from the West Coast, as the market tightened on lower refinery production during the outages at the Richmond and Torrance refineries.The gasoline crack averaged $42/b in October, a sharp drop of around $9 from the previous month’s average. US gasoline stocks increased last month, although remaining below average as refineries returned from maintenance. Thus gasoline will continue to remain under pressure from feeble domestic demand. With Hurricane Sandy having passed along the US East Coast, there are expectations of an impact on the gasoline market in the coming weeks, as the storm has led to disruptions and will also have some impact on the consumption side.

Middle distillate demand stood at around 3.7 mb/d in October, 50 tb/d above the previous month, but 200 tb/d down from the same month a year ago. Middle distillate cracks continued to improve from a month earlier, due mostly to favourable arbitrage opportunities to Europe and Latin America. Export opportunities to Europe and Latin America remained supportive of the US distillate market. In fact, according to the latest EIA report, distillate exports remained steady at a strong level of around 1 mb/d. Latin American demand for diesel has been the main factor contributing to the tightness in the US market, with Ecuador, Chile and Brazil among the major buyers.

This factor has kept US distillate stocks below the five-year average to drop beneath 120 mb, the lowest level seen in years. At the same time, US heating oil stocks are being drawn down, in line with higher demand ahead of the winter season. In addition, demand from the trucking sector, which serves as a barometer of the US economy, appears to be improving, as the American Trucking Association´s advanced seasonally adjusted For-Hire Truck Tonnage Index increased in September.

The gasoil crack on the US Gulf Coast gained almost $4 to stand at around $41/b in October. The market turned more bullish at the end of the month, with the expectation of Hurricane Sandy potentially leading to a reduction in product availability in the coming weeks. At the bottom of the barrel, fuel oil cracks gained some ground at a time of falling crude prices. However, product fundamentals remained weak. Demand remained below the seasonal average, due to limited bunker demand. Meanwhile, arbitrage opportunities to the Asia-Pacific were rather lacklustre, owing to feeble demand from, and abundant supplies in, the region. The fuel oil crack averaged $16.8/b in October, a sharp gain of $5.4 from the previous month, in line with the drop in the WTI price.

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