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Product Markets and Refinery Operations - Mar 13

Source: OPEC_RP130308 3/12/2013, Location: Europe

Product markets continued the upward trend during February. The top of the barrel became more bullish on the back of tightening sentiment, with gasoline inventories falling in the Atlantic Basin amid healthy cracks at the middle of the barrel. Additionally, in Asia, refinery margins continued to recover, supported by strong regional demand and expectations of tightening supplies in the region.

US Gulf Coast (USGC) refining margins continued to rise during February on the back of widening cracks across the barrel, led by gasoline.

US gasoline strengthened, supported by tightening sentiment due to supply issues on some shutdowns in the region amid falling inventories. Meanwhile, middle distillate demand recovered slightly and, along with a reduction in refinery runs, caused inventories to drop, lending additional support to the market.

The margin for WTI surged by $9 to average around $34/b. The margins for Light Louisiana Sweet and Arabian Heavy crude on the US Gulf Coast showed a sharp increase of $7 to stand at around $18/b and $14/b, respectively, in February, thus recovering the losses suffered during 4Q12.

Refining margins in Northwest Europe and the Mediterranean improved over the month, supported by the light end of the barrel which has steadily been gathering strength since early January.

The gasoline crack in Northwest Europe bounced higher on the back of transatlantic support. The market tightened as higher volumes were exported, mainly to the US East Coast, while gasoil cracks remained healthy.

The refinery margin for Brent crude in Northwest Europe showed a sharp gain of $3 to average $6/b in February.

Refinery margins in Asia continued to recover on the back of firm demand supporting product markets. This allowed the cracks to improve, boosted by expectations of tightening supply.

These developments caused refinery margins in Singapore to gain more than $3 to average $7/b in February.

Positive developments for product cracks at the top and middle of the barrel outweighed the pressure from higher Dubai crude prices. Given heavy refinery maintenance expected over March and April, tight supplies could continue to be a supportive factor for Asian refining margins over the coming weeks.

Refinery operations
Refinery throughputs in the US continued falling, affected by the maintenance season and some unscheduled shutdowns. This impacted inventories and supported the market by fuelling tight sentiment in the Atlantic Basin.

US refinery runs averaged 84% of capacity during February, a drop of about 4% in throughputs. The drop in runs was similar to the previous month and has impacted gasoline and middle distillate inventories in the US.

In mid-January, US product inventories stopped rising. Gasoline had reached a level of inventories in line with the five-year average and start to fall again, while middle distillates remained below average. This, along with a slight increase in demand, has fuelled bullish market sentiment.

Due to lower margins seen in Europe during the last quarter and some maintenance in the region, refiners continued their moderated throughputs. Refinery utilization averaged around 83% in January, 1 percentage point (pp) lower than a month earlier.

However, the recovery of the margins seen during January and February could encourage refineries to increase runs in the coming months.

In Asia, activity in most of the refineries rose during December and January, while some refineries have scheduled maintenance to start in March and April.

In Singapore and China, runs remained above 93% of capacity to meet the increasing demand in the region during the winter season, while Japanese throughputs continued to increase to over 83% of capacity in February, to meet increasing seasonal utility demand.

US market
US gasoline demand stood at around 8.5 mb/d in February, increasing around 100 tb/d from the previous month but down by around 170 tb/d from the same month a year earlier.

The gasoline cracks strengthened over the month of February, on the back of lower refinery run rates, causing production to decline. Some refinery problems and turnarounds boosted gasoline in the US mid-continent, opening the arbitrage to move supplies from the US Gulf coast. This helped to alleviate an overhang of supply in the US Gulf coast region, where demand was thin.

The gasoline demand showed signs of improvement with the 4-week average being higher than the previous month, although remaining below the y-o-y average. One positive sign was that, according to the report of the National Automobile Dealers Association, US car sales in January 2013 jumped by 14.3% y-o-y.

Additional backing came in mid-February when the inventories dropped to below average with imports declining due to weather-related complications affecting activity at East Coast ports. In addition, exports of gasoline and gasoline-blending components to Central and South America continued to be supportive on the back of unscheduled shutdowns across the region.

The gasoline crack averaged $47/b in February, a sharp increase of more than $12 from the previous month’s average.

Middle distillate demand stood at around 3.8 mb/d in February, nearly 300 tb/d above the previous month and around 200 tb/d below the same month a year earlier.

Ultra-light sulphur diesel (ULSD) exports to Europe were down in February, compared with the previous month, because the arbitrage window was shut as prices in the US were higher and demand in Europe lacklustre. However, middle distillate cracks recovered the ground lost last month with domestic demand improving, recovering from the low level experienced in January.

Middle distillate cracks widened over the reporting period with ULSD and heating oil cracks strengthening. The rise of the diesel crack could be attributed to the winter storms generating potential supply disruptions, while heating oil got support from the lower temperatures seen in some areas.

Additional support came from the supply side as, over the month, lower production caused inventories to drop to below 125 mb. This created some tightness in the distillate market, thus fuelling bullish sentiment and increasing net length of the Nymex heating oil futures contracts to the highest levels seen in nine months. This also reflects the expectations that rising exports will support prices.

The gasoil crack on the US Gulf Coast gained $5 to stand at around $37/b in February. At the bottom of the barrel, fuel oil cracks recovered part of the ground lost last month on the back of high sulphur fuel oil (HSFO) raising demand in the US Gulf coast due to opportunities to move volumes of HSFO to the USEC. However, the arbitrage opportunity soon rebalanced the market and capped gains.

The fuel oil crack averaged $17.6/b in February, gaining 60¢ from the previous month.

European market
Product markets continued to recover in Europe as sentiment tightened, fuelling a bullish mood in the Atlantic Basin, due to supply issues in the US amid lower inventories.

The gasoline crack in Northwest Europe surged during February on the back of renewed demand and supply issues from the USEC market, where some units’ shutdowns and closures are tightening the Atlantic Basin market and drawing more imports from Europe, thus supporting gasoline prices in Europe at unseasonably high levels.

The bullish US gasoline market has been boosted by a drawdown in gasoline inventories, and the market players have continued to increase net-long positions in Reformulated Blendstock for Oxygenate Blending (RBOB) gasoline futures in anticipation of tightening supplies in the coming months.

The gasoline crack spread against Brent crude averaged around $17/b in February, a sharp gain of $5 versus the previous month.

The Northwest European naphtha crack continued improving, supported by the European gasoline market. In addition, Asian naphtha offered support with petrochemical firms running their crackers at high capacity while refinery maintenance is also expected to constrict supplies over March and April.

Meanwhile, in the domestic petrochemical sector, the expectation of declining demand due to upcoming cracker maintenance in Europe and a weakening in European propane prices has left the market structure in deep backwardation.

The middle of the barrel remained stable and the gasoil crack strengthened as the market has begun to turn its attention to the spring refinery maintenance season, which will tighten supplies in Europe. The gasoil crack in Northwest Europe gained some ground over the month as prompt demand from export markets, including North Africa, overcame weak domestic demand.

Additional support coming from the supply side has helped the ULSD crack improve, as reduced refinery production in Northwest Europe — due to the unscheduled outage of a diesel producing unit in Scotland — and a decline in ARA stocks boosted the market. Furthermore, refiners have been looking to build up stocks ahead of the spring refinery maintenance season amid lower inflows from the US, where inventories were also falling.

The gasoil structure continued to remain in heavy backwardation on the back of this prompt export demand. The gasoil crack spread against Brent crude at Rotterdam gained around $2 to average $17/b in February.

At the bottom of the barrel, both fuel oil cracks continued to recover ground during the month, as the arbitrage from Northwest Europe and Mediterranean to the US Gulf coast provided an outlet for some cargoes of high-sulphur straight-run fuel oil (HSSRFO), supporting prices in Northwest Europe.

Domestic demand remained soft, but European supply has been going to Asia-Pacific, even though the arbitrage has narrowed during the last weeks, capping the gains in the cracks.

The Northwest European fuel oil crack spread against Brent gained $2 in February to stand at minus $12/b.

Asian market
The Asian market continued its recovery on the back of firm regional demand which, along with the expectations of tighter regional supplies, allowed cracks to improve.

The gasoline crack witnessed a sharp improvement over the month. The main supporting factor for this development was the prospect of tightening supplies over the coming period in line with the onset of the maintenance season in Asia. On the demand side, the higher requirements over the Lunar New Year holidays in China have boosted the crack.

Refinery turnarounds and expectations of tighter supplies boosted gasoline, with additional support from stronger regional demand, mainly from Vietnam and Indonesia. These factors allowed gasoline to show a sharp recovery. The crack spread against Dubai crude in Singapore gained more than $5 to average $18/b in February. Light distillate naphtha also showed a significant improvement on the back of healthy regional demand, mainly from Taiwan, South Korea and Malaysia. This allowed the crack to increase and move to the positive (increasing from minus $2/b to plus 70¢/b). Additional support came from the supply side, with the expectations of limited exports from India and the Middle East contributing.

At the middle of the barrel, the gasoil crack continued improving during February as sentiment has been lifted by growing requirements from healthy regional demand. This occurred amid expectations of tightening supplies due to upcoming refinery turnarounds in the region.

Chinese demand could also be a supportive factor over the coming period, given recent signs of stabilization in the manufacturing and industrial sectors.

In addition, Singapore’s onshore middle distillate stocks remained below the five-year average amid expectations of declining imports over the coming weeks.

The gasoil crack-spread in Singapore against Dubai gained almost $3 to average $23/b in February.

A fall in imports from the US and Venezuela pushed Singapore’s inventories of residual fuels lower, supporting the market. However, less demand due to lower utilization rates at Chinese independent refiners and the rise in crude prices caused the fuel oil crack spread in Singapore against Dubai to lose 60¢ to average minus $11/b in February.

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