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Product Markets and Refinery Operations - December 2016

Source: OPEC_RP161208 12/14/2016, Location: Europe

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Product markets showed a mixed performance in the Atlantic Basin during November. Refining margins got some support from the positive performance at the bottom of the barrel on the back of a tightening market. However the sharp fall of the gasoline cracks impacted margins in the USGC, while in Europe, refinery margins continued to rise, supported by a more balanced gasoil market. In Asia, margins strengthened on the back of firm regional demand.

US domestic gasoline demand continued showing healthy levels; however the pressure coming from the supply side with several refineries being back from maintenance and the return of the Colonial Pipeline operations caused gasoline crack spreads to suffer a sharp drop during November. This disappointing performance on the top of the barrel, along with an observed increase in inventory levels, caused US Gulf Coast (USGC) refinery margins for WTI crude to drop by more than $1 versus the previous month, to average around $5.2/b during November.

The European gasoil market was supported by slower inflows into the region, which, together with the positive performance seen in the fuel oil and naphtha markets, allowed the margins to continue healthy in Europe by offsetting the weakness seen in the gasoline fundamentals across the Atlantic. The refinery margin for Brent crude in Northwest Europe showed a slight gain of 20˘ versus the previous month, to average $7.2/b during November.

Asian product markets strengthened during November on the back of firm regional demand. The stronger demand reported at the top of the barrel, in addition to the market tightening at the bottom of the barrel, allowed refinery margins to continue to rise. Refinery margins in Singapore averaged around $8.5/b in November, up by 70˘ versus the previous month’s level.

Refinery operations
Following the peak of the global refinery maintenance season, which had more than 6 mb/d of capacity off-line in October, throughputs have been on the rise during November. Refinery utilization in the US averaged around 88%, corresponding to 16.2 mb/d, up by around 650 tb/d versus the previous month, but 140 tb/d lower than in the same month a year ago. This y-o-y drop came on the back of the impact of the Colonial Pipeline outage on some refineries in the USGC, despite refinery maintenance season ending.

European refinery runs averaged around 90% of capacity in November, corresponding to a throughput of 10.7 mb/d, which was around 190 tb/d higher than in the previous month and up by 280 tb/d from the same month a year ago, as refinery throughputs were on the rise following the end of the maintenance season in Europe.

In Asia, refinery utilization rates have been on the rise, following the peak refinery maintenance in the region. Refinery runs in India averaged almost 5 mb/d during October, around 150 tb/d higher than the previous month. Meanwhile Chinese refineries throughputs averaged over 11 mb/d during October, increasing 360 tb/d versus the previous month and hitting a new record-high level, following maintenance seen at several teapots refineries, and taking advantage of export quotas and stronger seasonal demand within the Asian region. Refinery runs in Singapore for October averaged around 90%, similar to the previous month, while Japanese throughput averaged 87% of capacity in November, 9 pp higher than the previous month, when several refineries were in maintenance.

US market
US gasoline demand stood at around 9.2 mb/d in November, approximately 80 tb/d higher than in the previous month and more than 60 tb/d higher from the same month a year earlier.

Despite healthy domestic demand, gasoline margins suffered a sharp drop during November, pressured by the supply side with several refineries being back from maintenance and the Colonial Pipeline returning to operation. Meanwhile inventories reversed their downward trend with a build of around 5 mb during November.

The gasoline crack spread showed a sharp loss of almost $4, compared with the previous month’s level, to average around $17/b in November.

Further losses were avoided by high export volumes, mainly to Latin America, which helped to ease the glut of products in the USGC caused by limited operation of the Colonial Pipeline during the previous weeks.

Middle distillate demand stood at around 4.0 mb/d in November, which is 80 tb/d lower than in the previous month and around 280 tb/d higher than in the same month a year earlier.

The middle distillate market continued to receive some support from higher export opportunities to Latin America and healthy domestic demand supported by the largerthan-expected harvest season. However, these factors were outweighed by increasing supplies, with the approaching end of the refinery maintenance season amid inventories on the rise. Another bearish factor has been the weakness seen in the arbitrage to Europe during the last weeks.

The USGC gasoil crack spread averaged around $8.2/b in November, losing more than $1 from the previous month’s level.

At the bottom of the barrel, fuel oil margins strengthened on the back of a tightening market as inflows to the region slowed, mainly from Latin America. Another supporting factor has been the open arbitrage from the USGC to Asia.

Meanwhile, low-sulfur vacuum gasoil (VGO) demand is expected to rise, with several secondary units back from maintenance.

The USGC HSFO crack spread gained around $2, to average minus $7/b in November.

European market
Product markets in Europe continued strengthening during November, with naphtha gaining support from stronger export opportunities. The continued recovery witnessed at the middle of the barrel on the back of a more balanced market along with a positive performance in the bottom of the barrel offset the weakness seen in gasoline fundamentals across the Atlantic.

The gasoline market weakened in Europe, due to the narrowing seen in transatlantic arbitrage with the Colonial Pipeline restarting operations in the US. Other bearish factors included slower export opportunities to Latin America and increasing supplies with several refineries finishing maintenance and ARA gasoline inventories increasing by almost 30% in November.

The gasoline crack spread against Brent lost around $1 from the previous month’s level to average around $19.4/b during November. Losses were limited by some support coming from export opportunities to Africa and the Middle East.

The light distillate naphtha crack continued to strengthen, gaining almost $2/b in November on the back of stronger domestic demand with several cracker units being back from maintenance amid open arbitrage to Asia. Additional support came from increases in LPG prices, enabling naphtha to become more competitive as a petrochemical feedstock.

The European gasoil market retained the recovery seen in the previous month on the back of support coming from continued slower inflows into the region, which has led to a more balanced market and caused ARA gasoil inventories to fall. Despite some recovery in Russian gasoil exports, this has been more than offset by reductions seen in arbitrage volumes coming from the US and the Middle East to Europe. Additional support came from healthy Latin American demand.

The gasoil crack spread against Brent crude at Rotterdam remained flat at the previous month’s average of around $12/b in November. Any uptick was limited by lack of support from domestic demand so far during the winter season.

At the bottom of the barrel, the fuel oil market continued its recovery trend on the back of a tightening regional market amid opened arbitrage opportunities to Singapore, which has lent support with increasing export volumes, despite the rise seen recently in ARA fuel oil inventories. On the other hand, some Baltic volumes have been pulled from Asia, thus reducing inflows over the European region.

The NWE fuel oil crack gained almost $2 compared with the previous month to average around minus $4/b in November. Additional recovery in the margins could be limited in the coming weeks with several refineries back from maintenance, contributing to an increase in supplies within the region

. Asian market
The Asian market continued to be healthy during November on the back of firm regional demand. Tight sentiment at the bottom of the barrel along with stronger demand reported at the top of the barrel lent support to the market and allowed refinery margins to continue to rise.

The Asian gasoline market was supported by strong regional demand, not only from the main importer, Indonesia, but also from India and Pakistan, while tightening market sentiment was further fueled by the outage of the FCC unit in a Vietnamese refinery, along with delays expected in the re-starting of some Indian refineries.

The gasoline crack spread against Oman crude in Singapore averaged around $12/b in November, gaining around $1 compared with the previous month’s level. Additional gains were capped by several refineries returning from maintenance.

The Singapore naphtha crack strengthened in November as support came from demand in the petrochemical sector with the return of steam cracker capacity in Singapore. Additional support came from increasingly competitive differential prices, versus LPG as a petrochemical feedstock.

At the middle of the barrel, the gasoil crack spread continued the recovery seen in the last month. Regional demand continued to show a typical seasonal rise, with Indian demand being boosted by the harvest season and the transportation sector’s requirements. However, this positive factor was offset by expectations of a long market with the end of the heavy refinery maintenance season amid increasing supplies reported from China and South Korea, while export volumes from Japan were seen increasing.

The gasoil crack spread in Singapore against Oman averaged around $12.5/b in November, gaining just 10˘ compared with the previous month’s level.

The Asian fuel oil market strengthened sharply on the back of stronger regional demand from Sri Lanka, Bangladesh and South Korea. Additional support came from a tightening market driven by delays in arrivals and some blend stock shortages, amid rising bunker demand in Singapore.

The fuel oil crack spread in Singapore against Oman averaged about minus $2/b in November, gaining more than $3 from the previous month.

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