Product Markets and Refinery Operations

Source: OPEC_RP140908 9/10/2014, Location: Europe

Product markets in the Atlantic Basin were supported by relatively higher US gasoline demand amid tightening sentiment fuelled by outages of some fluid catalytic cracking (FCC) units, which caused inventories to drop. Steady middle distillate demand amid lower inflows to the region prevented European margins from dropping, while margins in the US were boosted by falling WTI prices. In Asia, weaker light distillate demand, amid increasing supplies with the restart of several FCCs, caused refinery margins to weaken further.

US product markets strengthened during August as gasoline market fundamentals got support from the tightening environment generated by some FCC outages amid falling inventories. The drop in WTI prices also played a role in boosting margins. The refinery margin for WTI crude on the US Gulf Coast (USGC) showed a sharp gain of more than $3 to average $11.8/b in August. Meanwhile, the margin for Light Louisiana Sweet (LLS) crude on the USGC averaged $15/b during August, exhibiting a gain of around $4.

European refining margins retained the recovery seen since last month as middle distillate crack spreads were supported by the supply side on the back of lower inflows to the region and steady demand. The refinery margin for Brent crude in Northwest Europe showed a gain of more 40˘ to average $4.5/b in August.

Asian refining margins continued to weaken during August as an increase in gasoline supplies with several FCC units restarting caused the gasoline crack spread to drop sharply, which, along with the weakening naphtha market, kept pressure on light distillate cracks, thus contributing to continued weakening of refinery margins in the region. Refinery margins in Singapore remained at the low level seen last month, falling 17˘ to average minus 10˘/b in August.

Refinery operations
Refinery utilization rates in the US continued at very high levels with refinery utilization averaging 92.0%, which is a slight drop of about 0.7 percentage points (pp) versus the previous month. This decline was due to some refinery outages, mainly in the PADD-3, which generated a temporarily tight environment. Healthy margins encouraged increasing refinery runs over the last months, however the upward trend was affected during August by some unscheduled conversion unit shutdowns at several refineries.

European refinery runs averaged around 77% in July, corresponding to a throughput of 9.9 mb/d of refining capacity, 400 tb/d higher than the previous month due to some recovery seen in the margins since June. However, refinery runs remained at low levels as European refiners continued to feel pressure from increased competition and weak domestic demand.

In Asia, slower demand growth moderated refinery runs in several countries, mainly China and South Korea, while in India, unplanned shutdowns amid some conversion projects in the refineries have cut refinery throughputs. With several refineries being back from maintenance, an uptick in crude intake is expected within the Asia region in the coming months. Chinese refinery levels averaged 9.7 mb/d in July, about 400 tb/d lower than in June. Refinery runs in Singapore for August averaged around 93%, falling 1 pp versus the previous month. Japanese throughputs averaged 87% of capacity in July, 9 pp higher than in July, with several refineries coming back from maintenance.

US market
US gasoline demand stood at around 9.0 mb/d in August, about 40 tb/d higher than the previous month and around 50 tb/d lower than the same month a year earlier. The gasoline crack showed a slight recovery from the downward trend seen in July on the back of a tightening environment and falling crude prices. The market got support from the supply side with lower production as a result of several catalytic cracker units shutting down on the USGC, which tightened the gasoline market.

Falling inventories, mainly in PADD-3, also supported the market on the back of higher exports to Latin America amid USGC exporters sending more volumes to satisfy Midwestern requirements and gasoline players reducing inventories ahead of the switch to winter-grade gasoline quality in mid-September. The gasoline crack spread saw a slight gain of 50˘ to average $25.8/b in August.

Middle distillate demand stood at around 3.9 mb/d in August, broadly unchanged from the previous month and 200 tb/d above the same month a year earlier. The middle distillate market exhibited a sharp recovery this month, and crack spreads strengthened, with support coming from the supply side amid a decline seen in distillate stocks starting in August. Other supporting factors were lower gasoil production in the US due to some refinery outages as well as lower distillate yields, which stayed below 30% during the last weeks. Additional support came from the export side as demand from C&S America has drawn several ULSD cargoes from the USGC, mainly to Brazil. On the other hand, diesel volumes to Europe have been on the rise, in line with the improvement seen in the European market. The USGC gasoil crack saw a sharp gain of more than $5 versus the previous month’s level to average around $20/b in August.

At the bottom of the barrel, the fuel oil crack showed a vibrant recovery despite the higher availability of VGO due to some fluid cracker outages, which contributed to an increase in catalytic cracking margins. Firm bunker fuel demand in the USGC along with an increase in contract deliveries to cruise ships in Seattle lent support to the markets. The fuel oil crack in the USGC gained more than $6 versus the previous month’s level.

European market
In August, product markets in Europe continued to recover from the previous month as crack spreads received support from the supply side with lower inflows to the region and moderated refinery runs. The gasoline crack fell sharply during August due to a lack of export opportunities, pressuring the European market.

The gasoline market retreated in Europe since mid-August, despite the draw seen in US gasoline inventories, fuelling hopes of higher exports from Europe at the beginning of the month, however since mid-August, market support vanished as arbitrage from Europe to the US East Coast was seen as somehow limited with the US driving season demand approaching an end.

Additionally, weakening gasoline arbitrage to West Africa exerted further pressure on the market, as a result of excess volumes of European gasoline. The gasoline crack spread against Brent showed a loss of $3 to average $18.3/b in August. The light distillate naphtha crack lost the ground recovered last month due to the lack of an arbitrage window to Asia, as it has been partially suppressed by shipping availability and expectations of lower demand in Asia in coming weeks, fuelling bearish sentiment.

Middle distillate cracks continued their recovery trend during August on the back of a tight market amid a continued decline in crude prices. The ULSD crack in Northwest Europe continued recovering during August on the back of a tight environment fuelled by refinery outages in the region amid lower export volumes of ULSD from Russia. Exports out of Primorsk declined due to operational pipeline limitations. Higher demand for diesel ahead of refinery shutdowns in Europe underpinned prices and boosted margins in the region, thus allowing the diesel crack spread to recover to a healthy level.

The gasoil crack spread against Brent crude at Rotterdam gained more than $2 versus the previous month’s level to average around $15/b in August. Looking forward, increasing inflows in the coming weeks to Europe are expected from the US, Russia and the Middle East as new refineries’ ULSD volumes will be exerting pressure on the gasoil market in the region.

At the bottom of the barrel, fuel oil cracks continued to weaken over the reporting month despite some increases seen in bunker demand as higher sweet African crude inflows to the region kept pressure on the market. However, a tight sentiment in the market due to lower runs in the region amid expectations of higher arbitrage opportunities to Asia prevented the cracks from falling further. The Northwest European fuel oil crack remained around the same as the previous month’s average at around minus $13/b in August.

Asian market
The Asian market continued to be relatively weak during August as increasing gasoline supplies pressured the market and caused the gasoline crack to fall sharply, thus offsetting the recovery seen at the middle of the barrel and causing refinery margins to continue falling in the region.

The Singapore gasoline crack suffered a sharp drop during August due to pressure from the supply side amid weakening demand in several countries in the region. Gasoline supply side exerted pressure on the back of increasing availability with several cargoes being offered from Taiwan´s refinery while an increase in Singapore light distillate stocks also fuelled bearish sentiment. Additionally, the bearish sentiment was boosted further with the expected increase in supplies as several FCC units restarted operation within the region.

On the other hand, the gasoline market lost support from the demand side with depressed demand in some countries such as Indonesia and Japan and diminishing demand from India, thus impacting the gasoline market in the region. The gasoline crack spread against Dubai crude in Singapore showed a sharp drop of more than $6 to average $7.5/b in August.

The Singapore naphtha crack lost the ground it recovered last month as market sentiment became bearish due to expectations of oversupply with heavy arbitrage inflows and condensate splitters in the region staring up ahead of the upcoming ethylene cracker turnarounds in the region.

At the middle of the barrel, cracks recovered some ground on the back of steady demand in some countries amid export opportunities. The gasoil market was supported from higher export opportunities as buying interest emerged outside of the region, mainly from South Africa and the Middle East, following refinery maintenance. Additional support came from stronger demand in Australia and Malaysia.

The supply side was relatively balanced as expected higher exports from India, following improved monsoon rainfall, were offset by reduced exports out of China. The gasoil crack spread in Singapore against Dubai gained $2 versus the level of the previous month to average around $16/b in August.

The fuel oil crack recovered in Singapore on the back of tightening sentiment despite weak bunker and power demand. Fuel oil cracks ticked up over the month with the crack spread being supported by a temporary shortage in the availability of lower viscosity bunker fuel in Singapore. The tight environment was boosted by expectations of lower exports of 380 centistokes (cSt) fuel oil from the Middle East. The fuel oil crack spread in Singapore against Dubai gained more than $3 to average minus $10.3/b in August.

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