Analysis: Global gasoline refining margins slump on slow summer driving season

Formosa Petrochemical

17/06/2024 11:00

By Shariq Khan, Mohi Narayan and Ahmad Ghaddar
       NEW YORK/NEW DELHI/LONDON June 17 (Reuters) - Oil
refiners are making less money selling their gasoline as demand
during the peak summer driving season has fallen short of what
they expected when many of them boosted production. 
    Softness in gasoline markets have upended years of record
profits on selling transportation fuels. In the U.S., the
world's largest gasoline market, refiners ramped up sharply,
expecting demand that never materialized. U.S. gasoline demand
was 9 million barrels per day (bpd) in the first week of June,
1.7% below last year and seasonally the lowest since 2021,
government data showed.
    In Asia, weakness in the gasoline market has already led to
run cuts, and refiners elsewhere are also likely to pull back in
weeks ahead. This could reduce global demand for crude oil. 
    "Given the retreat from elevated margins, we cite risk to
refiners' continued maximum output strategy to reap record
profits," BMI, a unit of Fitch Solutions, said in a note last
month.
    Brent oil prices are down about 9% from a mid-April peak to
around $83 a barrel, most recently on concerns that the OPEC+
producer group will add supply to the market. The producer group
last week warned that a slow start to the summer driving season
and low margins are weighing on sentiment. 
    Even with crude prices slipping, Asian refiners' profit on
making gasoline from a barrel of Brent  Gl92-SIN-CRK  halved in
the last week of May to about $4 per barrel. A glut of fuel
supplies prompted the fall in refining margins, Wood Mackenzie
analyst Priti Mehta said.
    Overall refining margins fell under $2 a barrel in Singapore
in May, compared with an average of $5 a year ago.
    European gasoline refining margins fell to $10.80 a barrel
on June 13, the lowest since January 25. U.S. gasoline crack
spread, the difference between gasoline futures  RBc1  and the
cost of WTI crude oil  CLc1 , was under $22.50 a barrel for the
first time since February.
    
    
    PULLBACK
    Taiwan's Formosa Petrochemical Corp  6505.TW , one of Asia's
largest refined products exporters, plans to cut run rates at
its crude distillation units in June to 440,000 bpd, down 40,000
bpd from its original plan to process 480,000 bpd.
    "Increased flows from the Middle East to Asia and increased
Indian exports are weakening the cracks, otherwise demand in
Asia is healthy," a spokesperson for Formosa told Reuters.
    U.S. demand has been pressured by a mix of factors,
including more people flying instead of driving long distances
and more fuel-efficient cars and electric vehicles, UBS analyst
Giovanni Staunovo said last month.
    Higher output from American refineries, combined with weak
demand, has lifted U.S. gasoline stockpiles by 5.7 million
barrels since the start of April to 233.5 million barrels by
June 7, the highest for this time since 2021.
    U.S. refiners cut run-rates to 95% in the week ended June 7,
after utilizing a one-year high of 95.4% in the prior week, U.S.
Energy Information Administration (EIA) data showed. That was
the first cut since April.
    They will need to lower rates further if demand remains
lackluster, Mizuho analyst Robert Yawger said.
    "We're looking at the potential for one of the worst years
for summer U.S. gasoline demand in the post-COVID world. No way
that refiners can continue to crank fuels at 95% utilization,"
he said.
    The EIA on Tuesday lowered its forecast for U.S. gasoline
consumption this year to 8.89 million bpd from an earlier
estimate of 8.91 million.
    
    OVERWHELMING SUPPLY
    Margins should improve as U.S. gasoline rises as it
typically does throughout the summer, Rabobank strategist Joe
DeLaura said. Yet he warned the market has consistently
underperformed.
    Margins should get some support from a slower-than-expected
ramp up of new refineries such as Mexico's Olmeca refinery in
Dos Bocas, which is aiming to lower the country's import needs.
As of May, however, Dos Bocas was behind schedule and did not
produce commercially viable gasoline and diesel. In Nigeria, the
Dangote refinery delayed gasoline deliveries until July.
    The market must still adjust to overwhelming supply growth
from new refineries ramping up and expansions of existing plants
which have boosted fuel exports from the Middle East, India and
China.
    Gasoline exports from the Middle East have been at seasonal
records over the last six months, according to Kpler data.
    Indian and Chinese refiners are taking advantage of access
to discounted Russian oil, Mehta said. Their higher supplies are
likely to keep Asian gasoline cracks under pressure through the
summer, she said.
    "The peak for gasoline (cracks) was already reached in
April, when cracks averaged $17.3/bbl Dubai crude in Asia. We
don't expect them to strengthen a lot through the summer
period," Mehta said.
    Chinese gasoline exports grew by about 100,000 bpd in May
from April, ending last month at around 350,000 bpd, according
to WoodMac. Indian gasoline exports averaged 360,000 bpd in May,
up 50,000 bpd on the month.

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Gasoline margins slump across major trading hubs    https://reut.rs/3VF3dYX
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 (Reporting by Shariq Khan in New York, Mohi Narayan in New
Delhi, Ahmad Ghaddar and Robert Harvey in London, and Stefanie
Eschenbacher in Mexico City; Editing by Liz Hampton and David
Gregorio)
 ((Shariq.Khan@thomsonreuters.com; Twitter/X: @shariqrtrs;
Office: +1 (646) 261-7893;))