A combination of a prolonged winter in the USA with other bullish factors including planned and unplanned refinery outages in the Atlantic Basin, higher demand for light distillates and gasoline stock-draws in the USA underpinned product market momentum and lifted refinery margins across the globe in March. In the USA, due to less strength of the WTI crude oil compared to other benchmarks, product market performance outpaced crude oil market gains, and refinery margins for WTI in the Gulf Coast surged significantly to $11.13/b from $4.22/b in February. European refiners also benefited from the persistent bullish market sentiment, and benchmark Brent crude oil margins soared to $5.34/b in March from $3.86/b in the previous month. Similarly, Asian refinery margins followed suit soaring to $5.41/b from $4.12/b in the previous month.
Due to falling US gasoline stocks in recent weeks and continuing refinery maintenance in the Atlantic Basin, the persisting bullish sentiment of the product markets may continue in the very short term supporting crude prices. However, with the completion of the refinery maintenance and increase in output, product markets may lose some of their current bullish momentum in the near term.
At the beginning of this year, refinery operations had been negatively affected by the poor economics of the refiningindustry. When market momentum switched and refinery margins rose, the refinery utilization was expected to improve further, especially in the USA,compared to the same period last year.This expectation was reinforced by lowerplanned refinery maintenance and higherdemand for light distillate products. A combination of refinery snags and scheduled refinery maintenance has caused the refinery utilization rate in the USA to remain at about 84% in March. The refinery utilization rate in the USA may surge in the next months. In Europe, refinery operations were also negatively affected by the maintenance schedule and a general strike at the refinery hub at Lavera. The European refinery rates plummeted by 4.1% compared to the previous month to reach 82.5%. In Asia, refinery turnarounds will begin this quarter. However, the Japanese refinery utilization was almost 5% lower than the same month last year, but remained unchanged compared to February, recording 98.8%.
Following gasoline stock-draws over the last couple of weeks, market players increased long positions in the gasoline futures market and gasoline prices rose both in the futures and physical markets. The gasoline crack spread against benchmark WTI crude oil surged to $32.96/b in late March from $19.54/b earlier in the same month. Extensive planned and unplanned refinery turnarounds, higher demand, lower domestic output and lower imports have contributed to such significant positive developments in the gasoline market.
Although this situation triggered concern about potential gasoline supply shortages in the upcoming driving season, however, with completion of refinery turnarounds, the US gasoline inventory position is expected to become less tight in the next months. As a result, the current bullish momentum of the gasoline market is expected to ease.
Recent refinery snags along with the continuation of cold weather in the US Northeast have also provided more support for middle distillate and crude oil markets. The lowsulphurgasoil crack spread versus WTI reached about $20/b in March from around $14.50/b in the previous month. By the end of the winter season, heating oil may lose its strength, but higher demand from the agricultural sector might lend support to the diesel market,which is the major share of middle distillate components.
Despite the good performance of the top and the middle part of the barrel complex, the fuel oilmarket was relatively weak in the USA, and its discount against WTI widened further in March compared to the previous month. Bearish developments of the US fuel oil are likely to continue over the coming months.
European product markets have benefited from favourable arbitrageopportunities to the USA and Asia, which in turn led to a better achievement of different components of the barrel complex. the European gasoline crack spread versus benchmark Brent crude oil has surged sharply since the middle of February, reaching about $20/b in late March. Apart from arbitrage opportunities, refinery snags and a general strike at the Lavera oil hub also contributed to bullish developments in the European gasoline and naphtha markets.
The current bullish momentum in the light distillate product market has also lifted European distillate prices in the physical and the futures markets. The gasoil crack spread against Brent in the Rotterdam market has recovered from its earlier losses exceeding $14/b in late March. With the approaching holiday season, the European distillate market may remain relatively strong over the next months.
As far as the fuel oil market is concerned, European market sentiment improved due to more favourable arbitrage opportunities to Asia and the export of a large volume of high-sulphur fuel oil to Asia. Despite the recent improvement in the European fuel oil market, the fuel oil crack spread against Brent is expected to remain at a relatively high discounted level.
Positive developments in the US market overwhelmed the bearish developments in the Asian gasoline market and lifted gasoline prices in Singapore in March. The gasoline crack spread against benchmark Dubai crude oil surged to above $17/b in late March from around $13/b in the same period last month. With the start of seasonal refinery turnarounds, the current bullish sentiment may persist. However, with the completion of refinery maintenance, the gasoline market may lose its current strong ground.
Apart from gasoline, the naphtha market also helped to drive the Asian product markets. Withrising Indian exports and the approaching cracker maintenance period, the bullish momentum ofthe naphtha market has eased recently, but market players believe that it might rebound in the second half of the year.
The Asian distillate market, which has been negatively affected by the unusually warm weather, also turned slightly bullish due to steady Indonesian demand and the expected refinery maintenance, which could tighten regional supplies. This situation has lent support to the gasoil price, and its crack spread versus Dubai soared by about $3/b, reaching $18.69/b in the last week of March.
In the high-sulphur fuel oil market, spot prices have improved sharply in March, but its crack spread against Dubai remained wide. A combination of refinery maintenance, higher demand and lower supply may provide further support to the Asian fuel oil market over the next two months.