Product markets in 2017 saw record-high refinery margins across the globe, and this encouraging momentum for global product markets has continued in the 1Q18. In the lead up to the summer season in the northern hemisphere, indicators are pointing to this positive and optimistic outlook remaining in place.
The US is typically the key driver for product markets in the run-up to the summer driving season. Demand in the US had an excellent start to the year, with monthly data for January 2018 showing combined gasoline and diesel growth of around 845 tb/d y-o-y, and total combined oil products growth of around 1 mb/d, the highest in 22 years (Graph 1). The weekly data for February and March has further supported this positive trend. In addition, most of the products showed an encouraging trend, with diesel oil seeing strong growth. Demand for diesel oil was encouraged by the positive macroeconomic indicators, higher demand for residential heating fuel, higher domestic freight shipment, up by 12% y-o-y, and a stronger y-o-y housing market.
Furthermore, this optimism is supported by continuous draws in major oil product stock categories, with US gasoline stocks dropping for five consecutive weeks and distillates stocks dropping for eight out of nine weeks to now stand below the five-year average. At the same time, US commercial crude oil stocks are far below the levels witnessed in the last few years, standing below the latest five-year average for the last three weeks. These developments could lead to tightening market prospects during the summer, lending additional support to refining margins.
Additional backing could be derived from vehicle sales, which have shown strong increases in the EU in the first two months of 2018, up by 6.5% compared to the previous year. In Asia, new car sales started strong in 2018 as the six ASEAN nations’ car sales increased by 9% in January y-o-y. In India, new car sales from the three largest car manufacturers also posted strong growth figures compared to the same time last year, and in China new car sales have grown strongly since the beginning of 2018. In addition, the recent lifting of a five-month restriction on heavy-duty trucking and industrial production in northern China is expected to support the regional diesel market. If this trend continues, it could further support product markets in the coming months.
Similarly, reports of impending refinery closures along with crude intake reductions in Latin America will potentially unlock additional product demand in the region and open up export opportunities from other main markets. This will provide further support to the global product market. This positive global momentum is also reflected in global average gasoline retail prices that were up by $10/b y-o-y in the 1Q18, as well as diesel, which increased on average by $14/b compared to the 1Q17 in all major trading hubs. Looking forward, a healthy global economic forecast for 2018, positive car sales data in recent months, stronger 2018 y-o-y US product consumption in January and potentially tighter global product markets are expected to boost gasoline and distillates demand, which is forecast to grow by around a combined 992 mb/d in 2018 (Graph 2). High conformity levels observed by OPEC and non-OPEC producing countries in the Declaration of Cooperation, which has led to the downward trend in oil inventories, particularly in the OECD, should further enhance market stability and support crude and product markets in the months ahead.
Source: OPEC