The performance of product markets typically follows seasonal patterns, with refining margins recovering during the driving season in the Northern Hemisphere. Last summer, refinery margins across the globe saw some support, but exhibited only a mixed performance year-on-year.
US refinery margins showed solid gains in the summer months of 2018 compared with the previous year, averaging $5.63 higher. This was mainly attributed to robust diesel demand, as well as strong gasoline exports and operational adjustments that contributed to higher margins. US diesel inventories reached record lows during the summer and remained below the 5-year average in 2018. Moreover, diesel exports were considerably lower, showing a declining trend since 2015. At the same time, the pace of growth in US gasoline consumption weakened y-o-y (Graph 1). This was attributed to fuel efficiency gains, reduced consumer spending and trend toward fuel substitution toward EV’s and natural gas. In contrast to diesel stocks, gasoline inventories in 2018 remained well above the 5-year average for most of the year, reaching record highs during the last quarter. Gasoline exports are generally moderate over the summer to accommodate domestic consumption, but have grown considerably y-o-y since 2015. As a result of these diverging trends, the US product market has been increasingly sustained by robust diesel consumption, with some support from gasoline exports.
In Europe, refinery margins showed a negative performance y-o-y over the summer, averaging minus $1.5, pressured mainly by weaker diesel cracks. Europe has been diesel’s biggest market in past years but this has changed in recent years. Governments have enacted bans on older diesel cars in selected city streets in Germany, Spain, France and Italy. As a consequence, diesel consumption for passenger cars has declined, while gasoline cracks have seen a moderate upside as new car buyers switch from diesel- to gasoline-fuelled engines.
In Asia, refinery margins also showed a negative performance of minus $1.5 y-o-y over the summer. Although Asian gasoline and diesel consumption softened in 2018 (Graph 2), the diesel remained well supported, as demand more closely follows economic growth due to its use in industrial, mining, and farming, in addition to the transportation sector. In contrast, recent additions of refining capacity in the region have led to a downturn in the gasoline market, where cracks dropped from near parity to gasoil in August 2017 to a $14.08 discount in February 2019. This was attributed to a growing gasoline surplus as gasoline demand got slower regionally and globally.
Looking ahead, product markets are expected to come under pressure as refineries resume operations following peak spring maintenance due to higher product availability. However, with the start of the driving season, some support is expected from the mild pick-up in transport fuels, mainly driven by gasoline. While US gasoline demand growth is expected to continue to slow, refining economics should remain well sustained, amid healthy exports. Meanwhile, diesel demand for both transportation and the industrial sector will remain robust and jet fuel cracks are set to gain some upward momentum during the peak travel season across the globe. However, expectations for a slight slowdown in economic growth for the current year point to some weakening in demand growth for middle distillates.
In Europe, product markets are expected to be supported over the upcoming summer season by declining but still strong domestic diesel consumption, as well as firm jet fuel demand. Further support is likely to come from a possible pick up in domestic gasoline consumption, as well as exports, particularly to West Africa. Given the high gasoline supplies in Asia, the downward trend in gasoline cracks could continue once refineries return from spring maintenance. Moreover, recent capacity additions are bound to trigger further bearishness. This development could lead to a re-occurring gasoline surplus, keeping refining margins partially depressed, despite positive prospects for sustained middle distillate demand during summer. Even if gasoline markets both in Europe and in Asia were to see any significant upside, the lower global gasoline and diesel consumption baseline in the first quarter of this year (Graph 3) point to a less optimistic outlook for product markets globally in the coming driving season.
Source: OPEC