European Market - August 2016

Product markets in Europe showed mixed performances during July, with gasoline and gasoil crack spreads weakening due to regional oversupply, while the bottom of the barrel continued exhibiting a strong recovery on the back of a tightening market.

The gasoline market continued weakening in July, due to a lack of export opportunities, as high inventories reduced interest in imports from the USEC.

The gasoline crack spreads continued losing ground in July, as regional oversupply outweighed strong seasonal demand. Additional pressure came from increasing inventories in the region. Another bearish factor has been lower export opportunities to the Middle East and West Africa. The gasoline crack spread against Brent saw a drop of more than $4 from the previous month to average around $17.4/b. Strong export opportunities to Latin America could lend support to European gasoline, while exports to Nigeria are expected to pick up soon.

The light-distillate naphtha crack weakened due to oversupply in the region with slowing demand from gasoline blenders amid reduced arbitrage to the Asia Pacific region. There are expectations of increasing demand in the coming weeks, with some crackers being back from maintenance amid healthy margins in the sector.

The European gasoil market reversed the recovery trend witnessed last month, due to pressure coming from the supply side as increasing regional supplies outweighed the slower Russian inflows resulting from maintenance in that country. Weak domestic demand also exerted pressure, although it was partially compensated for by higher exports to North and West Africa. The gasoil crack spread against Brent crude at Rotterdam averaged around $9/b in July, losing more than $2 versus the previous month’s level. Increasing volumes are expected in the coming weeks from Asia and the Middle East, which could continue pressuring the gasoil market.

At the bottom of the barrel, the fuel oil market continued exhibiting a strong recovery on the back of a tightening market with strong demand in the Mediterranean area amid lower inflows from the Black Sea as Russian exports fell due to the starting of new conversion capacity. Support also came from the re-opening of arbitrage opportunities to Singapore amid falling inventories.

The NWE fuel oil crack gained almost $3 compared to the previous month to average around minus $7/b in July.