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Product Markets and Refinery Operations - November 2017

Source: OPEC_RP171108 11/13/2017, Location: Europe

Product markets in the Atlantic Basin weakened during October due to a decline in gasoline demand following the end of the US driving season. Nevertheless, the US saw solid product demand for this time of the year, global product markets were tight on low stock levels, and reduced scheduled maintenance lent some support to margins.

In Europe, refinery margins declined amid high product supplies, lower demand and higher stock levels seen at the top and bottom of the barrel, while margins received some support from the middle of the barrel on the back of solid demand.

In Asia, product markets also weakened slightly, but remained healthy as support came from the top and middle of the barrel, on the back of firm regional demand, supported by the onset of refinery maintenance.

Refinery margins
US product markets received very strong support in the previous months on the back of significantly higher US gasoline demand. However, with the end of the driving season in the US, the typical seasonal slowdown in gasoline demand has exerted pressure on the gasoline market in the Atlantic Basin. Sharp losses across the barrel caused refinery margins to decline. In the USGC, refinery margins weakened significantly due lower seasonal demand despite remaining at healthy levels amid low inventories. Refinery margins in the US averaged $12.4/b in October, dropping $3.8/b m-o-m, but higher by $6.0/b y-o-y.

The European product market showed a weak performance in October as refinery margins fell due to pressure coming from the supply side with increasing inflows amid a lack of export opportunities impacting the top and bottom of the barrel. The refinery margin for Brent Crude in Northwest Europe dropped by $2.4/b from the previous month to average $7.03/b, unchanged compared to same month a year ago.

Asian product markets also weakened slightly on reduced arbitrage opportunities to Europe, despite healthy regional demand in Asia, offset by supply side pressure resulting from the start-up of capacity expansion in the Chinese refining sector. The Asian market saw weakening all across the barrel, with the exception of naphtha, which continued to strengthen m-o-m. The refinery margin for Oman in Asia dipped by $1.7/b from a month earlier to average $9.36/b, gaining $1.6/b y-o-y.

Refinery operations
In the US, refinery utilization rates have been on the rebound after the plunge observed last month caused by hurricane disruptions. In early October, refinery run recovery experienced a slowdown caused by a slight drop in refinery intake as two refineries were shut down prior to tropical storm Nate to prevent damage. A reduction in scheduled maintenance work on US refineries in October supported throughput, as 41% of crude that was offline in September was recovered. Refinery utilization averaged 87.5% in October, corresponding to 16.2 mb/d, 3.1% higher compared to the previous month, and 2.1% higher y-o-y.

European refinery utilization rates averaged 89.9% in October, corresponding to a throughput of 10.4 mb/d, a drop of 2.8% compared to a month earlier, down by a slight 1.0% y-o-y. The decline in utilization rates came on the back of seasonal maintenance, as a significant total of 2.2 mb/d of refinery crude intake was projected to be offline in October.

In Asia, refinery runs in Japan in October averaged 81.7%, a decline of 8.7% compared to a month earlier and an increase by 5.7% y-o-y. Meanwhile, in China, refinery utilization rates averaged 86.8% in October, down by 6.8% m-o-m, and a drop of 1.8% y-o-y. The decline of refinery rates in Asia is due to continuing significant maintenance previously scheduled for October. Despite a decline compared to the 5-year record high refinery utilization observed in China last month, owed to Petrochina’s Yunnan 260 tb/d refinery start-up, higher throughputs are expected in the coming months as the CNOOC Huizhou 200 tb/d refinery begins full operation and refinery maintenance season comes to an end.

Product markets
US market
US product markets weakened in October, despite receiving support on the back of strong product demand from the middle of the barrel. Lower product stock levels and refinery maintenance provided further support.

Jet/kerosene crack spreads in October dropped by $5.7/b m-o-m to average $18.49/b, but exhibited a $7.2/b improvement over the previous year.

Gasoil crack spreads averaged $14.53/b, down by $2.1/b m-o-m, but showed a $5.13/b improvement compared to a year earlier, on strong support from export opportunities.

The fuel oil market in the US weakened, as tightening market sentiment amid low stock levels on the back of high net exports was offset by higher domestic supplies. US fuel oil cracks dipped by $2.7/b over the previous month to average minus $4.0/b and improved $5.13/b y-o-y.

European market
Product markets in Europe weakened in October on high gasoline and fuel oil supplies, although receiving some support from solid middle distillate demand.

Premium gasoline crack spreads showed a drop of $4.7/b m-o-m, driven by high regional supply which was further pressured by reduced US arbitrage openings. The gasoline crack spread averaged $18.8/b, down by $1.57 y-o-y.

The European jet/kerosene crack spread averaged $14.08/b, down slightly by 60˘/b m-o-m as weaker demand was offset by refinery outages, but remained up by $2.32/b y-o-y.

The gasoil market in Europe mostly continued the strong performance during the month to decline slightly by 85˘/b over a month earlier to average $14.41/b, exhibiting a $2.33/b gain y-o-y.

European fuel oil 3.5% crack spreads weakened slightly due to high regional supply, lower demand and higher ARA inventories. Fuel oil cracks dropped by 86˘/b from the previous month to average $14.41/b, but showed a $2.33/b gain y-o-y.

Asian market
Asian product crack spreads in October are on a gradual downward trend, despite solid regional demand and some support from naphtha and ongoing refinery maintenance work offset by supply side pressure due to Petrochina’s Yunnan refinery capacity addition. Additional pressure also emerged from the exhaustion of Chinese product export quotas, which limited refineries and traders export volumes.

The Asian gasoline crack spread dropped m-o-m showing a $1.86/b dip for Gasoline 92 and a $2.07/b dip for Gasoline 95. At the same time, Asian gasoline cracks showed a 86˘/b y-o-y gain for gasoline 92 and 60˘/b y-o-y gain for Gasoline 95. In the month of October, gasoline cracks weakened seasonally, however they remained supported by strong domestic and regional demand from India and Japan. Furthermore, Naphtha cracks also strengthened on strong petrochemical feedstock demand during the month.

The jet/kerosene crack spread in Asia declined by $1.4/b from the previous month to average $14.32/b, receiving some support from strong regional demand from India. Y-o-y, the crack gained $1.90/b.

The gasoil crack spread in Asia dropped by 98˘/b over a month earlier to average $14.41/b but gained $2.33/b y-o-y, despite support from strong regional demand.

During the month, the fuel oil crack spread exhibited weakening, down by 47˘/b m-o-m, as demand of lower utility and bunker fuel dropped, amid higher western arbitrage volumes.

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