Oil product markets in the major consuming regions performed well this summer, favoured by the seasonally-higher gasoline demand. US refinery markets averaged as high as $20/b by the end of the summer, representing an improvement over the same period last year and close to the high levels seen in July 2015 (Graph 1). Products markets in Europe were also healthy, supported by the strengthening middle distillate complex, as well as planned maintenance. Meanwhile, a slight improvement was observed in the Asian market due to continued healthy demand in the region this year. In terms of individual products, the gasoline market performed better this summer compared to the same period last year. Healthy demand along with arbitrage volumes heading to the US Atlantic Coast supported the refinery margins. Middle distillates also improved, boosted by healthy economic activity.
Looking ahead to the coming quarters, crack spreads tend to peak during the driving season and then drop into the fourth quarter, as lower gasoline demand outweighs the pick-up in distillate consumption from colder weather. Last year, the warmer-than-normal winter weather particularly weighed on product markets. In contrast, the current forecast for this year expects winter temperatures to be colder than last year, leading to higher consumption in distillates, which include heating oil.
With the market moving into the winter season, distillate fuel supplies are notably tight, representing a change from the excess supplies seen in the last two years. US distillate inventories started 2017 above the five-year range but have since fallen below the five-year average (Graph 2). As noted in last month's Feature Article, disruptions caused by Hurricane Harvey have deepened the already steady drawdown in US distillate stocks. Although daily refinery margins fell back from a spike to $26.20/b, they still remained around $12/b, well above the $6-7/b level seen over the same period last year.
An additional factor supporting middle distillates has been support from bullish sentiment in the futures market. Hedge funds have accumulated a record high heating oil futures positions (Graph 3), anticipating distillate stocks will remain relatively tight this winter.
As a result, refinery margins are likely to continue to see support, remaining at seasonally-high levels. This, together the ongoing improvement in global economic activity, should provide support for the oil market over the winter season.
Source: OPEC