Product Markets Ahead of Winter - Oct 13

A review of product market developments over the recent months shows a mixed performance. In the US, improving seasonal product demand hiked margins since the second quarter and encouraged refineries to increase runs. Refiners also benefited from competitively-priced regional crude supplies and robust export demand for refined products. However, the narrowing Brent-WTI spread has eroded some of the competitive advantage enjoyed by US refiners.

In contrast, product market sentiment in Europe has remained weak, affected by economic concerns in the region and limited export opportunities to the US. However, hopes for a recovery in product demand have emerged since July, despite margins having been squeezed by the increase in crude prices and ample supplies of light distillates, which have led to reduced refinery runs in the region.

In Asia, light and middle distillate cracks supported the market in the second quarter, amid healthy fundamentals due to higher seasonal requirements and a temporary tightness in middle distillate supply. This situation reversed over the summer during the lower-demand monsoon season, causing margins to fall into negative territory.

In terms of products, middle distillates have retained some strength on the back of tightening expectations ahead of the autumn maintenance season. Both the top and bottom of the barrel have weakened worldwide, due to lacklustre demand, amid rising supplies, and the end of the driving season in the Atlantic Basin. As a result, refinery margins have fallen across the globe, losing more than $3/b since July.

Global refinery throughput reached a seasonal peak of around 78 mb/d in July, to average 77.2 mb/d in the third quarter, a gain of 1.1 mb/d compared to the same quarter last year. However, throughput is expected to decline in the fourth quarter due to expectations of weaker margins and the onset of seasonal maintenance, which is estimated to take more than 2 mb/d of capacity off-line.

Turning to the outlook for the winter season, product market developments are expected to continue to vary between the regions. US diesel demand could show a further recovery on increasing rail and trucking activities, which have kept middle distillate demand at over 3.8 mb/d. In Europe, there have been signs of a slight recovery in economic activities, which may limit the expected decline in demand for transportation fuel. In addition, the seasonal rise in heating oil requirements should also add support over winter.

In contrast, Asia’s contribution to growth in total product demand – one of the key drivers of the market in recent years – has begun to show signs of decelerating. In addition to typically low demand during the monsoon season, demand growth over the coming months is likely to be affected by the reduction in diesel subsidies in several countries, including Indonesia and Malaysia. Moreover, the increasing use of coal and natural gas as substitute fuels for power generation, particularly in Japan and South Korea, has also dented product consumption.

At the same time, global product markets are likely to see increasing supply due to additional export volumes, mainly from China and India, as well as Russia, the US, and Saudi Arabia. The middle distillate market in particular is expected to be negatively impacted given the new hydro-cracking capacity coming on line (Graph 2). Despite the more positive outlook for the US and Europe, global product markets are expected to come under pressure over the winter season. The combination of sluggish demand and increasing product supplies are likely to dampen margins, leading to lower refinery runs over this period.