Product Markets and Refinery Operations - March 2016

Source: OPEC_RP160308 3/14/2016, Location: Europe

Refinery operations
Refinery utilization rates continued a downward correction, mainly in the Atlantic Basin, as some refiners have been cutting runs for economic reasons due to the downward trend seen in the last months as the spring season impacted refineries, mainly in the US. In the coming month, more run cuts are expected, with the spring maintenance season peaking worldwide, along with the product oversupply environment. Refinery utilization in the US averaged around 87% in February, corresponding to 15.7 mb/d, and was 400 tb/d lower than a month earlier. The refinery level has been impacted by maintenance and some unscheduled shutdowns, mainly in PADD1. Pressure from high inventories has caused refineries to minimize gasoil production during the last weeks. However, middle distillate inventories continued to exert pressure on the market and could lead to further cuts.

European refinery runs averaged around 90% of capacity in January, corresponding to a throughput of 10.5 mb/d. This was around 100 tb/d lower than in the previous month and around 200 tb/d higher than the same month a year ago. European refineries have continued to increase throughputs, taking advantage of healthy margins. However, product overhangs impacting margins could encourage run cuts during the maintenance season.

Asian refinery utilization has been on the rise during the last months, with Chinese refineries hitting a new record of around 10.77 mb/d during December. However, during January, a downward correction in response to the oversupply of products has impacted refinery margins across the region. During January, refinery runs in China averaged 10.5 mb/d, a reduction of almost 300 tb/d versus the previous month. Refinery runs in Singapore for January averaged around 83%, a similar level to a month earlier. Meanwhile, Japanese throughputs remained at around 89% of capacity in February.

US market
US gasoline demand stood at around 9.3 mb/d in February, which is approximately 500 tb/d higher than in the previous month and more than 600 tb/d higher than in the same month a year earlier.

Despite the strong domestic gasoline demand, the gasoline crack spreads lost some ground, pressured by the oversupply environment in the Atlantic Basin, with floating storage being reported in USGC and NWE. The transition to the summer gasoline grade is contributing to the bearish environment.

Another bearish factor was the continued rise in gasoline inventories, which hit a record-high figure of about 255 mb in February. The gasoline crack spread lost almost $3 versus the previous month’s level to average $17/b in February.

Middle distillate demand stood at around 3.4 mb/d in February, some 80 tb/d lower than in the previous month and more than 900 tb/d lower than in the same month a year earlier.

The middle distillate market continued to exhibit very weak fundamentals, with demand remaining at multi-year lows. However, some support came from the supply side with lower distillate production on the back of lower refinery runs seen in the last weeks. The USGC gasoil market got additional support from higher exports to Latin America, along with open arbitrage to the NYH. Firmer Nymex futures also added support ahead of the spring refinery season.

The USGC gasoil crack averaged around $7/b in February, recovering around $1 from the previous month, when it had hit its lowest level in more than five years. At the bottom of the barrel, the fuel oil market continued its recovery trend from a slump suffered at the end of the year. An open arbitrage to Singapore has lent strong support to the HSFO market. Meanwhile, the VGO market has been under pressure due to increasing inflows over the region amid some FCC units being in maintenance, which has cut demand.

The USGC high sulphur fuel oil crack gained more than $3/b in February to average around minus $10/b.

European market
Product markets in Europe weakened during February as crack spreads were under pressure across the barrel due to the oversupply environment amid a lack of export opportunities for light distillates and fuel oil. Meanwhile, the oversupply environment continued to weigh on middle distillate fundamentals.

The gasoline market weakened during February, and NWE gasoline crack spreads lost some ground due to reduced export opportunities, not only to the US, where inventories remained high, but also to West Africa, with some unloading delays seen in Nigeria.

In addition, elevated gasoline production has kept gasoline inventories in Europe on the rise, thus exerting further pressure on the market. Meanwhile, the upcoming switch to summer-grade quality has caused many players to start emptying tanks of winterspecification gasoline, thus increasing prompt availability.

The gasoline crack spread against Brent lost about $5 to average around $17/b in February. The light distillate naphtha crack continued to decline during February, losing almost $4, due to reduced arbitrage volumes to Asia and lower domestic demand for the petrochemical sector and gasoline blenders.

The European gasoil market has been oversupplied since the end of the year amid elevated production and high inventories. During February, the improvement seen in heating oil demand amid relatively colder temperatures has lent some support to the gasoil market. Additional support came with the lower inflows seen from the US in the last weeks, as arbitrage from the USGC has been somewhat limited.

However, this improvement was capped by high inventories and increasing inflows from Russia and India, which continued to weigh on the market. Gasoil crack spreads remained weak.

The gasoil crack spread against Brent crude at Rotterdam averaged around $8/b in February, similar to the previous month’s level.

At the bottom of the barrel, the fuel oil market retained the ground it recovered during the previous month on the back of a balanced market and some temporary tightening sentiment fueled by lower inflows from Russia, where higher domestic heating demand has limited exports to Europe, thus helping to ease oversupply.

The NWE fuel oil crack remained fairly flat versus the previous month to average around minus $11/b in February, a similar level to a month earlier. A potential crack spread uptick was limited due to arbitrage opportunities to Asia, although the continued drawing of volumes from the region has been relatively reduced during the last weeks.

Asian market
The Asian market weakened in February. Higher light distillate inventories in Singapore amid the oversupply environment caused the gasoline and naphtha crack spreads to suffer a sharp fall. This, along with the continued weakening at the middle of the barrel, caused refinery margins to exhibit a sharp loss in the region.

The gasoline market has become bearish due to the higher inventories in Singapore amid increasing supplies from northeast Asia, mainly from Japan and India. The Singapore gasoline crack spread reversed the upward trend seen in the last months and suffered a sharp loss, despite higher demand reported from the Middle East and Africa. The worldwide gasoline market was impacted by the oversupply environment seen in the Atlantic Basin, amid the continued increase in Singapore light distillate inventories, which hit a multiyear-high record level.

The gasoline crack spread against Oman crude in Singapore averaged around $11/b in February, losing more than $8 versus the previous month’s level. The Singapore naphtha crack continued losing ground over the month, dropping almost $5/b, impacted by the oversupply environment amid expectations of lower demand with the upcoming seasonal steam cracker maintenance in Japan and South Korea.

At the middle of the barrel, the gasoil market continued under supply pressure, and the crack spreads continued at the low level hit in January. Increasing inflows from the Middle East have contributed to gasoil inventories in Singapore continuing to rise, which has kept pressure on the market.

However, the supply pressure was somewhat offset by the support coming from strong demand emerging from South Africa. Additional support came from the tightening sentiment fueled by the upcoming refinery maintenance amid some reductions seen in Chinese exports, along with expectations of a seasonal demand increase over the coming weeks.

The gasoil crack spread in Singapore against Oman remained at the previous month’s level to average around $10/b. The Asian fuel oil market weakened during February as crack spreads were pressured by thin bunker demand ahead of the Chinese Lunar New Year celebrations. Another bearish factor was the expectation of higher arrivals of inflows to the region in the coming weeks.

However, some support remained from firm demand in the power generation sector, mainly in South Korea and Pakistan. The fuel oil crack spread in Singapore against Oman lost more than $2 to average about minus $7/b in February.




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