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US Product Markets and Refinery Operations

Source: OPEC 8/25/2013, Location: North America

US gasoline demand stood at around 9.0 mb/d in July, 120 tb/d higher than the previous month and up by around 220 tb/d from the same month a year earlier. The gasoline crack lost ground, despite a slight improvement seen in the implied demand, which reached 9 mb/d, thus remaining above the previous year’s level. However, higher domestic demand and the uptick in export levels of gasoline were not enough to balance higher production as refinery runs remained high and the persistently high seasonal inventories -- particularly the high levels seen in PADD-1 on the back of higher imports during the previous months -- kept pressure on the gasoline market. In recent weeks, the supply side lent some support with refiners trying to limit gasoline output by reducing its yield, although this still remains above levels seen last year.

Another support for gasoline prices remains structural, thanks to high-octane differentials. Moreover, a high Renewable Identification Number (RIN) price has started to limit some inflows from Europe since the recent increase. On the other hand, supply concerns started to ease in the middle of the month, as most of the gasoline production units suffering outages starting July are already back on line. The gasoline crack showed a loss of $3 in July, to average $34/b. The developments in the crude market also played a role in this negative performance. Middle distillate demand stood at around 4.0 mb/d in July, 110 tb/d lower than in the previous month but around 430 tb/d above the same month a year earlier. Middle distillate cracks weakened over the last month, despite domestic demand recovering from the low levels seen in the previous months, due to increasing supplies and higher crude prices weighing on the market.

On the other hand, exports, which during the previous months had been declining sharply, have being showing signs of recovering thanks to higher demand in Central and South America and continued diesel exports to Europe.

Despite the relatively high cost of production with firm WTI crude prices, high cost of biofuel blending in recent weeks has provided firms with an incentive to export their products.

These higher exports have lent some support to the market and prevented the crack from falling further. However, middle distillate prices were unable to follow the impressive rise in crude prices and the USGC gasoil crack exhibited a sharp loss of more than $4 to stand at around $16/b in July.

At the bottom of the barrel, fuel oil cracks continued losing ground, and during July took a big hit, affected by feeble bunker demand, unfavourable arbitrage to Asia and reduced exports to Latin America.

The fuel oil crack lost almost $8 to average minus $1.5/b in July, sinking into the negative territory after being on the positive side for more than 24 months.

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