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Product Markets and Refinery Operations - May 2017

Source: OPEC_RP170508 5/11/2017, Location: Europe

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Product markets in the Atlantic Basin strengthened during April. This was supported by firmer domestic demand, amid higher export opportunities, which along with lower inflows due to heavy refinery maintenance fuelled a tightening environment. The main support came from gasoline as domestic US gasoline demand recovered in April following a slump in the first quarter, alongside a shift to summer grades and higher exports to Latin America. Meanwhile, Asian margins continued to be healthy on the back of firm regional demand, amid the peak of the regionís maintenance season.

Refinery margins
The US market saw strong support from the rally in gasoline crack spreads. This was on the back of increasing domestic gasoline demand, which recovered following a slump during 1Q17. Another supporting factor was the higher exports opportunities to Latin American countries. US Gulf Coast (USGC) refinery margins for WTI crude gained almost $3/b compared to the previous month to average $10.60/b in April. This is the highest level seen in the last 20 months.

Product markets in Europe strengthened during April, supported by stronger regional demand and higher arbitrage export opportunities amid lower inflows into the region that fuelled tightening sentiment. Product crack spreads exhibited gains across the barrel with gasoline showing the best performance. The middle distillates market became more balances due to a reduced economic arbitrage from the US and lower exports from the Baltic, due to this regionís heavy maintenance season.

The refinery margin for Brent crude in NWE gained more than $2/b over the previous monthís level to average $8.2/b in April.

Asian product markets recovered during April, supported by firm regional demand amid tightening sentiment fuelled by the regionís peak maintenance season. This along with lower inflows into the region, allowed the product crack spreads to strengthen across the barrel and refinery margins in Singapore gained more than $1/b versus the previous monthís level, to average around $8.50/b in April, a relatively healthy level.

Refinery operations
The refinery utilisation rate in the US averaged around 92% during April, corresponding to 17.0 mb/d. This represented an increase of more than 1 mb/d from the previous monthís level and was around 960 tb/d higher than the same month a year ago. With the approaching end of the spring maintenance season, refinery runs have been on the rise, hitting the highest level witnessed in recent years, as several refineries came back on line. However, this contributed to gasoline inventories reversing the previous downward trend. They increased by around 2 mb during April after falling in previous months, thus fuelling bearish market sentiment at the end of the month.

European refinery runs averaged around 89% of capacity in April, corresponding to a throughput of 10.6 mb/d. This is some 200 tb/d higher than the previous month and around 600 tb/d higher than the same month a year ago when the sector was impacted by a French strike. Refinery throughputs continued to hold at a high level in Europe, with healthy margins amid strong export opportunities.

In Asia, refinery runs in India averaged around 5.0 mb/d during March, similar to the previous monthís levels. Meanwhile, Chinese refinery throughputs averaged 11.0 mb/d during April. This is around 200 tb/d lower than in March due to the impact of maintenance. Refinery runs in Singapore averaged around 89% in March, falling around 2 pp versus the previous month due to some refinery maintenance. Japanese throughput averaged 84% of capacity in April, corresponding to 3.2 mb/d.

Product markets
US market
US gasoline demand stood at around 9.2 mb/d in April. This is approximately 90 tb/d lower than in March and at a level similar to the same month a year earlier.

Improving domestic gasoline demand, which recovered during April from the slump suffered during the first quarter when it lost around 160 tb/d (y-o-y), lent support to the US gasoline market. Other supporting factors were the shift in mid-April to summer grades and the continuing higher exports to Latin America.

With the approaching end of the spring maintenance season, refinery runs have been on the rise in recent weeks, causing an increase in inventories of around 2 mb during April. This follows falls in previous months, thus fuelling bearish market sentiment toward the end of the month.

The gasoline crack spread continued to strengthen to average around $25/b in April. This is a sharp gain of more than $4/b compared with the previous month. It is expected that with the start of the US driving season the gasoline market will continue to see support.

In the middle of the barrel, gasoil demand stood at around 4.2 mb/d in April. This is the same level as the previous month and around 360 tb/d higher than in the same month a year earlier.

The gasoil market has been supported by strong domestic demand, which was above last yearís March level, with a boost from increasing requirements in the agricultural sector. Additional support came from higher export volumes to Latin American countries, mainly Brazil and Chile.

The arbitrage to Europe was limited, although it improved at the end of April.

The USGC gasoil crack spread averaged around $9/b in April, retaining the previous monthís level. Any potential uptick was limited by the pressure coming from the supply side with refinery throughputs on the rise, with many back from maintenance and yields remaining on the high side.

At the bottom of the barrel, fuel oil market lost some ground pressured by increasing inflows into the region from Europe, but mainly from Mexico, where availability was on the rise due to some secondary unit outages.

In addition, the fuel oil market was supported by strong VGO buying interest, with several FCC units coming back from maintenance in the USGC.

The USGC HSFO crack spread lost around 50Ę to average minus $5.8/b in April. Further losses were avoided by the tightening seen in Latin America due to refinery maintenance.

European market
Product markets in Europe strengthened during April supported by firmer domestic demand amid higher export opportunities that alongside lower inflows amid heavy refinery maintenance fuelled a tightening environment.

The gasoline market strengthened in Europe during April, amid stronger domestic demand and export opportunities. Higher requirements were witnessed in the Middle East due to refinery issues reported in Kuwait and the UAE, while weak arbitrage to the USEC and West Africa in recent weeks has been offset by increasing imports from North Africa and Latin America.

The gasoline crack spread against Brent gained more than $4 from the previous monthís level to average around $23/b during April.

The light distillate naphtha crack remained flat in April. Despite continuous pressure on the market from the typical seasonally lower demand, due to falling LPG prices that made naphtha less competitive as a petrochemical feedstock, support came from export opportunities to Asia following a reopening of the arbitrage.

The European gasoil market recovered from the ground lost in March as the market tightened on the back of heavy maintenance and slower inflows into the region amid some outages. In addition, the weakening in heating oil demand, due to warmer spring weather, was compensated by stronger diesel demand with firm requirements being reported from Germany, Poland and Turkey, as well as export opportunities to Latin America, mainly to Argentina.

The market was also supported by lower inflows to the region, due to a reduced economic arbitrage from the US and lower exports from the Baltic, due to lower availability, given agriculture demand and the regionís heavy maintenance season.

The gasoil crack spread against Brent crude at Rotterdam gained $1 compared with the previous monthís level to average around $11.60/b in April.

At the bottom of the barrel, the fuel oil market showed some recovery in April. This was on the back of stronger regional demand with tightening sentiment, fuelled by maintenance in the region amid slower inflows from the Baltic. Other bullish factors supporting the market were the arbitrage opportunities to Asia and the fall seen in the ARA fuel oil inventories.

The North West Europe (NWE) fuel oil crack gained $1/b compared with the previous month to average around minus $5.70/b in April.

Asian market
The Asian market strengthened in April, supported by firm regional demand, amid tightening sentiment fuelled by the peak of regional maintenance season. This allowed the product crack spreads to recover across the barrel and the refinery margins to reach a relatively healthy level.

From the perspective of the Asian gasoline market, a recovery was witnessed during April on the back of firm regional demand amid tightening sentiment. Meanwhile, the supply pressure eased further with exports slowing from Japan and mainly from China, which was impacted by domestic consumption and quotas administration.

The gasoline crack spread against Oman crude in Singapore averaged around $12/b in April, gaining almost $2/b compared with the March level. Further support may be seen in the coming weeks with expected stronger regional demand, mainly from India and South Korea.

The naphtha market recovered some ground in Asia, and the Singapore naphtha margins gained 50? in April. This was on the back of tightening sentiment fuelled by reduced supply from the Middle East, due to outages in some splitter units. However, the uptick was limited by slowing LPG prices, which started to pressure the naphtha market.

In the middle of the barrel, the gasoil crack spread showed some recovery. It was supported by the seasonal tightening in the market, with peak refinery maintenance and stronger regional demand.

Additional support came from some requirements from Qatar, as well as the recovery in domestic Indian demand.

The gasoil crack spread in Singapore against Oman averaged around $12.20/b in April, a gain of almost $1/b compared with the previous monthís level. The uptick was capped by increasing inflows into Singapore, due to limited East-to-West arbitrage.

The Asian fuel oil market tightened with the onset of refinery maintenance and higher residue cracking capacity in the region. Amid limited West arbitrage the market was also supported by a recovery in bunker demand and volumes heading to the Middle East and Pakistan.

The fuel oil crack spread in Singapore against Oman averaged about minus $4.80/b in April, gaining 70? against the previous monthís level. The uptick was limited by expectations of increasing inflows in the coming weeks.

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