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Product Markets and Refinery Operations - March 2017

Source: OPEC_RP170308 3/14/2017, Location: Europe

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Product markets in the Atlantic Basin exhibited a mixed performance during February, as higher gasoline export opportunities to East of Suez, along with tightening sentiment fuelled by the falling ARA gasoil inventories, lent support to the European market. In the US, the weakening seen at the top and bottom of the barrel caused margins to fall.

Meanwhile, refinery margins in Asia remained healthy ahead of the spring refinery maintenance season, despite a slight fall due to some signs of a bearish gasoline market.

The weak seasonal domestic gasoline demand and the high level of gasoline inventories in the US East Coast (USEC) ahead of the transition to summer grades were driving bearish sentiment in the gasoline market causing a sharp drop in gasoline cracks spreads. This, along with the weakening seen at the bottom of the barrel, made the US Gulf Coast (USGC) refinery margins for WTI crude fall more than $1 compared to the previous month to average $6.50/b in February.

Product markets in Europe continued their recovery trend in February, supported by higher arbitrage opportunities for gasoline to the Middle East, Africa and Asia Pacific. The European products market was also supported by stronger regional demand, mainly in the barge market of Rotterdam as activity increased with Rhine water levels back to normal.

Additional support came from a more balanced middle distillates market. The gasoil crack spread strengthened – on the back of tighter supplies amid falling ARA inventories ahead of the spring maintenance season – driving bullish sentiment in the market.

The refinery margin for Brent crude in Northwest Europe (NEW) gained more than $1 over the previous month’s level to average $7.50/b in February.

Asian product markets continued to be supported by firm regional demand which, along with some refinery outages fuelling bullish sentiment ahead of the maintenance season in the region, allowed refinery margins in Singapore to remain healthy, averaging around $8.50/b during February, losing a slight 30¢ versus the previous month’s level.

Asian margins suffered a slight impact due to the weakening seen at the top of the barrel as high inventories in the US fuelled bearish sentiment to the Asian market, amid some pressure coming from the increase seen in Northeast Asian exports.

Refinery operations
The refinery utilisation rate in the US averaged around 85% during February, corresponding to 15.6 mb/d. This represented a sharp drop of around 800 tb/d compared to the previous month and was around 150 tb/d lower than the same month a year ago. The pronounced fall seen in refinery intakes is due to several factors, including the start of the spring maintenance season in the region, some unit outages resulting in limited operations and higher product inventories encouraging some economic adjustments.

European refinery runs averaged around 89% of capacity in February, corresponding to a throughput of 10.55 mb/d a similar level to the previous month up by around 200 tb/d from the same month a year ago. Refinery throughputs continued at a high level in Europe ahead of the upcoming spring maintenance season to enjoy healthy margins and catch up with strong domestic demand and arbitrage export opportunities at the top of the barrel.

In Asia, refinery utilisation rates continued to rise during the last month, taking advantage of firm seasonal regional demand, although some refinery outages have impacted the sector, mainly in Taiwan. In the coming weeks it is expected that several refineries undergo maintenance, which could put more than 2 mb/d of capacity in the Asian region offline. Refinery runs in India averaged around 5.0 mb/d during January, which was 80 tb/d lower than in the previous month. Meanwhile, Chinese refinery throughputs averaged 11.2 mb/d during February, increasing around 600 tb/d compared to the previous month.

Refinery runs in Singapore averaged around 91% in January, similar to the previous month, while Japanese throughput averaged 93% of capacity in February.

US market
US gasoline demand stood at around 8.7 mb/d in February, approximately 450 tb/d higher than in the previous month and 520 tb/d lower than in the same month a year earlier.

Bearish sentiment continued to be fuelled by high gasoline inventories, remaining well above the five-year average level and exerting pressure on the USEC where they increased the most. Another factor impacting the gasoline market has been the upcoming transition to higher Reid vapour pressure (RVP) summer grade, thus encouraging traders to clear winter grade inventories.

The gasoline crack spread showed a sharp drop of more than $3, compared with the previous month’s level, to average around $17/b in February. Additional losses were avoided by the stronger exports to Latin America.

At the middle of the barrel, the gasoil demand stood at around 4.0 mb/d in February, which is 380 tb/d higher than in the previous month and around 10 tb/d higher than in the same month a year earlier.

The middle distillate market continued to receive support from higher export opportunities to Latin American countries, mainly Chile, Guatemala and Mexico. This has compensated for the lower requirements reported from Brazil.

Additional support came from the increase seen in diesel demand ahead of the planting season amid news about outages in hydrocracker units in Louisiana, which fuelled a tightening sentiment ahead of the maintenance season in the region.

The USGC gasoil crack spread averaged around $10/b in February, remaining flat from the previous month’s level. The market got support from the supply side with distillate inventories falling 7 mb in February.

At the bottom of the barrel, fuel oil margins fell as increasing supplies, amid a weakening winter power generation demand, have impacted the market. In addition, higher volumes coming from Europe and Russia were pressuring the fuel oil market as weakened FCC margins led to a long VGO market.

The USGC HSFO crack spread lost more than $1 to average minus $5/b in February.

European market
Product markets in Europe continued their recovery trend during February, supported by stronger domestic demand amid gasoline export opportunities to the Middle East, Asia Pacific and Africa. Additional support came from a more balanced middle distillates market as reduced inflows to the region were seen.

The gasoline market continued strengthening in Europe on the back of stronger regional demand, mainly in the barge market of Rotterdam amid higher export opportunities to the Middle East, Asia and West African markets (mainly Ghana and Nigeria). This compensates the weakness seen in transatlantic arbitrage, which has been closed due to the high level of US gasoline inventories.

The gasoline crack spread against Brent gained more than $1 from the previous month’s level to average around $20.60/b during February. Additional support is expected in the coming weeks during the maintenance season when the market could become tighter.

The light distillate naphtha crack weakened, losing almost $1/b in February as the market has been hit by falling domestic demand with the maintenance of several steam cracker units in Europe. Demand for gasoline blender remained weak. Additionally, arbitrage to Asia has been reduced during the last weeks due to weakening seen in the Asian naphtha market.

The European gasoil market recovered some ground during the last month on the back of stronger heating oil demand supporting the market amid the recovery of Rhine river water levels, which allowed barge operations. This contributed to a reduction of more than 10% in ARA gasoil inventories during February, thus fuelling bullish sentiment to the market.

Another bullish factor has been the reduced inflows to the region – not only from the Black Sea, where exports have been so far delayed by bad weather conditions but also from the East of Suez, as exports to Europe have been falling amid lower availability. This has offset the increasing arbitrage from the US.

The gasoil crack spread against Brent crude at Rotterdam gained 60¢ compared to the previous month’s level to average around $11.10/b in February. Further support came from export opportunities as higher requirements have been reported from North and West Africa.

At the bottom of the barrel, the fuel oil market in February partially lost the ground gained in the previous month due to slower regional heating demand amid reduced arbitrage opportunities to Asia. This, along with ample supplies, caused ARA fuel oil inventories to increase more than 20%, thus driving a bearish sentiment in the market.

The NWE fuel oil crack lost more than $1 compared with the previous month to average around minus $5.30/b in February. Further losses were avoided by some VGO demand seen in Spain and Turkey.

Asian market
The Asian market got support from expectations of a more balanced market in the lead up to the onset of the regional maintenance season. This occurred amid stronger middle distillates demand fuelling bullish sentiment, while refinery margins managed to remain healthy during February despite the weakening seen at the top of the barrel.

The Asian gasoline market weakened slightly during February as high inventories in the US fuelled bearish sentiment to the Asian market. In addition, some pressure came from the supply side with an increase seen in Northeast Asia exports (mainly Taiwan and China), which along with the higher supplies coming from the new capacity online in India has been exerting pressure on the gasoline market.

The gasoline crack spread against Oman crude in Singapore averaged around $12.40/b in February, losing 40¢ compared with the previous month’s level. Further losses were avoided by strong demand being reported from Vietnam, which offset the slower demand reported in Indonesia amid expectations of a tightening market during the onset of the maintenance season.

Singapore naphtha partially kept the recovery seen in the previous month, supported by stronger demand in the ethylene petrochemical sector and the start of a steam cracker unit in India. However, any additional uptick was capped by news about Taiwanese cracker units planning their maintenance program and additional volumes expected from the Middle East.

At the middle of the barrel, the gasoil crack spread retained the ground gained in the previous month and showed a slight strengthening supported by a more balanced market amid expectations of tightening with the onset of the maintenance season in the region. Supply pressure has been easing as high diesel exports from China have been reduced due to the seasonal inventory build and Indian gasoil production has dropped, thus offsetting the reduced East to West arbitrage.

Another supporting factor was the stronger demand being reported from South Asia, with Sri Lanka boosting its gasoil requirements for power generation due to a severe drought.

The gasoil crack spread in Singapore against Oman averaged around $12.20/b in February, gaining slightly by 30¢ compared with the previous month’s level.

The Asian fuel oil market continued weakening during February due to pressure coming from the supply side with increasing inflows over the region (mainly from the Middle East) amid expectations of higher arbitrage volumes in the coming weeks. Meanwhile, regional demand for power generation and heating has started to slow.

Another bearish factor has been the stock build seen in Singapore, which increased more than 20% during February, due to bunker fuel demand in Singapore, which was impacted by the New Year’s holidays.

The fuel oil crack spread in Singapore against Oman averaged about minus $5.50/b in February, losing more than $2 from the previous month. Further losses were avoided by stronger demand reported from Pakistan and Vietnam.

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