Product markets in Europe lost the ground recovered last month due to crack spreads being pressured by weakness at the top and middle of the barrel, while a strengthening Brent crude price also played a role.
Gasoline cracks saw a correction, losing ground in May after peaking in April, but remaining at healthy levels with support coming from some volumes headed to West Africa. Bearish sentiment was prevalent in the US, particularly as the country continues to produce gasoline at very elevated levels. This could limit the expected increase of volumes heading to the US over the start of the summer driving season, which has been supporting the European gasoline market in previous years. The gasoline crack spread against Brent exhibited a drop of more than $2 to average $18/b in May. The light distillate naphtha crack dropped slightly due to some bearish signals emerging from the petrochemicals market. These included naphtha cracker margins in Northwest Europe falling recently to a y-t-d low as lower ethylene prices and weakening demand for co-products all pressured margins. This has caused European petrochemical players to reduce utilization rates to below 80% in recent weeks.
Middle distillate cracks weakened during May, due to pressure coming from the supply side amid weak demand. The ULSD crack in Northwest Europe was seen at its lowest level in more than one year as the European market continued to feel pressure from high inflows, mainly from higher imports from Russia and the USGC weighing on prices. In addition, bearish sentiment was boosted with some domestic refineries restarting following maintenance, as well as higher ARA gasoil stocks. The latest Euroilstock refinery data showed middle distillate output in the EU-15 & Norway region up by around 160,000 b/d m-o-m to 5.5 mb/d in April, the highest level since September last year. The gasoil crack spread against Brent crude at Rotterdam fell more than $2 versus the previous month’s level to average $12/b during May.
At the bottom of the barrel, fuel oil cracks continued weakening over the reporting month due to subdued regional demand. Increasing inflows weighed on the high-sulphur fuel oil market. Although the glut could ease as companies build cargoes to ship to Asia Pacific, several VLCCs booked from the USGC to the Singapore region have limited exports from Europe. In the LSFO market, some support came from the supply side as there has been a lack of African barrels both in terms of crude and LSFO. However, the increase in the Brent crude price caused the crack spread to fall. The Northwest European fuel oil crack lost more than $1 versus the previous month’s level to average minus $11/b in May. Looking ahead, the picture is turning slightly bullish with expectations of higher demand ahead of the cruise season.