Listen: Road fuel availability dampens price sentiment ahead of US driving season

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Joel Hanley:

Hello, and welcome to the Platts Oil Markets podcast from S&P Global Commodity Insights. I'm Joel Hanley.

With people beginning to head out on their holidays, gasoline is traditionally a major product over the summer. However, given weakened product demand and healthy supply, what can we expect from this typically premium product in 2024?

To many people, summer in the Northern Hemisphere conjures images of going to the beach or family picnics and the occasional major sports tournament. For the oil industry, however, it has long been more closely linked to gasoline. Other refined products tend to get a seasonal bump around this time of year too, with bunker fuel furnishing the increased ferry traffic in the Mediterranean, and jet fuel enables millions of tourists to go and get sunburned somewhere more exotic than home. But with the US motorist being a powerful force in road fuel demand, the fabled driving season has traditionally lifted gasoline demand and, therefore, prices in the West.

So are we seeing that yet in 2024? Well, I'm joined in London for this episode of the podcast by Platts, lead gasoline reporter, Matthew Tracey-Cook, and Kelly Norways on our news team, who focuses mostly on the downstream. Now, Matthew, as I mentioned just then, the gasoline market always has the weight of summer expectation on its shoulders this time of year. Very often, there's big demand in the US. There's increased demand in Europe as well, maybe West Africa too. And we tend to see prices rising. How is it standing up to the test this year?

Matthew Tracey-Cook:

Yeah, thanks, Joel. I think the short answer would be it's a pretty terrible situation. As you've said, gasoline's an extremely seasonal market. Summer driving season sees a lot more demands. People go on trips. And, typically, we would see a pretty steep market structure and cracks, refining margins, climbing quite a bit. However, this year, the market's been very different. So if you compare to this time last year, we were in about a $25 backwardation, and the cracks were in the low $20 range. But we actually flipped into a contango, so we're in about a dollar contango, and cracks are in the low teens. It's a pretty abysmal situation. Most traders seem pretty disappointed. There were very high expectations. About two months ago, the market was pretty steeply backwardated, octane pool was pretty tight. And people were typically... As usual, people were excited for the driving season. But, right now, it's a very different story.

Joel Hanley:

So we're seeing weaker demand across a lot of products in various markets, including crude oil, in fact. We're seeing quite heavy supply, maybe somewhat limited demand. Is that a similar situation playing on the prices in gasoline?

Matthew Tracey-Cook:

Yeah, whether or not it's a supply or demand picture, I'd say it's pretty mixed, but it's biased a bit towards the supply side. Demand is not terrible, but it's not great either. So if you look at US product deliveries, which is a proxy for demand in the US, they're a hair below where they were last year. They're quite a bit below 2019 levels, but that's been usual for the last few years ever since COVID. Europe is pretty similar. Inland demand is fairly flat. Actually, one trader said that German demand is slightly up on the year. And the Med is a bit stronger as well. But, really, demand is not showing much of a significant change up or down on the year.

I think the real story is on the supply side. So refineries have been producing a lot. There's been a super sharp ramp up in terms of utilization rates in the US in particular. So there's a really heavy turnaround season. And refineries have been producing really hard for the last few years with really, really high cracks, but, obviously, they can't do that forever. Lots of refineries went offline. But then, after the turnaround season, I think the market was caught by surprise at how quickly the refineries came back online. So there was this really sharp ramp up and traders were caught by surprise. The market was full of gasoline. So stocks have really responded to that. We've been seeing stocks in PAD1 and in ARA jump really significantly over the last few weeks.

Joel Hanley:

Well, interesting you mentioned a bit of an uptick in Germany. Of course, there's one of those major sporting tournaments there right now in the form of the Euros 2024 football tournament. Kelly, Matthew just mentioned refineries, and I know there's been a few turnarounds. BP Whiting is down in the States. There's a few things here and there. Is that having a major impact? Are refineries focusing on gasoline as they used to at this time of year?

Kelly Norways:

Yeah, so after a pretty heavy maintenance season in the US, we're now seeing supply come back online pretty strongly. Global refinery downtime is set to drop below the five-year average for this time of year in the week to June 21st, having totaled around 620,000 barrels per day in the previous week. And as Matthew touched on, in the US, utilization levels are ramping up fairly strongly. According to the latest EIA data, we're seeing utilization levels across the US at around 95%. And those levels are looking particularly strong across the Midwest, where the majority of that maintenance was focused.

Also, looking at how capacity has evolved historically, the EIA was also showing that operating capacity has expanded relatively prominently in the US on the year. So in the US, total operating capacity was up 4% in 2024, thanks to expansions that we've seen in Texas and other parts of the US. And that's contributing to these capacity expansions and stock bills that we're starting to see there.

And then, just lastly, in Europe, we're also seeing a pretty strong supply side story. So in the Mediterranean, in Northwest Europe, we've got downtime at its lowest levels since February, with major turnarounds at ExxonMobil's Port Jerome and Neste's Porvoo completing. So worldwide, it's a story of improving gasoline supplies. If we look at the crucial fluid catalytic conversion units, we're seeing expansions on that side too. In Europe, we've got some maintenance happening at Tupras's Izmit refinery in Turkey. But, generally, it's pretty strong on the runs that we're seeing across the board.

Joel Hanley:

So with all that utilization, and a large amount of refineries working as hard as they can to produce as much product as you can, you imagine in a flattish to slightly bullish demand picture, that leads to a bit of a glut of not just gasoline... Because, let's not forget, a refinery doesn't just create one thing. There's jet fuel, there's fuel, or there's LPG. There's all these other things as well. How does that impact the broader refined products picture? Because, yes, gasoline is one thing and it tends to be profitable, so do the middle distillates, but what about fuel? What about diesel?

Kelly Norways:

Yeah, it's been a surprising shift when it comes to the optimization dilemmas that refiners are posed with at this time of year. Typically, you'd expect refiners to be running or optimizing to shift to maximum gasoline yields to capture this seasonal driving demand that we'd expect to see. But, interestingly, this sluggishness that we're seeing across the gasoline markets has coincided with an uptick in the outlook for distillates. So as we saw gasoline moving into contango, that's coincided with a surprise shift in the ICE Low Sulphur Gasoil structure back into backwardation. So it really underscores this tepid driving season and, potentially, a premature end to seasonal gasoline strength that we'd expect to endure throughout the summer.

So as a result, we're seeing that diesel cracks have regained a premium to gasoline across all global refining hubs, which is pretty atypical for this time of year. You'd expect that shift to happen far later in the summer. And how refiners respond remains to be seen. What we're hearing from traders is a shift in yields to try and capitalize on these strong distillate cracks and maximize distillate output. Certainly, in Europe, how that plays out further forward will be interesting to watch. We did see this strengthening in the structure on the distillates picture last year, but there's still some expectation that we might not see that strengthen as prominently as we did in 2023. Because you're still looking at a situation where you've got macro weakness, you have ample supplies in Europe. Those dynamics are bucking the typical trends that we'd normally see in the summer.

Joel Hanley:

Yeah, I suppose they can trim runs, of course, and as you say, they can refocus. Some refineries have the ability to refocus quite quickly on different products. They can take in different grades, use different units, change the catalyst, whatever. They can optimize, as you say. But either way, if they're still going great guns, there will be something of a surplus of refined products. We have seen a storage increase. We've seen maybe contango here and there in various refined products. What are the traders saying for the rest of the season, Matthew, on gasoline? Is there much contango set to stay, or is that the expectation?

Matthew Tracey-Cook:

Yeah, I think traders don't see a huge amount of hope, barring any major supply disruptions, any extreme weather or extreme heat. I think that traders are seeing a pretty bearish picture for gasoline for the rest of the season. And, actually, very recently, things have gotten a bit worse. So a couple of days ago, there was an announcement by the US government, suggesting that they would release some more crude from the Strategic Petroleum Reserve with the stated aim of lowering gasoline prices further. Obviously, this coming in the midst of an election cycle, this is with the goal of lowering gasoline prices and improving the outlook for the election. That's just another further bearish factor in the midst of what would typically be a very bullish time for gasoline. Traders are watching arbs very, very closely. I think, in a situation where, overall, the flat flurries and cracks have declines, if traders can manage to capitalize on any geographical or time spreads, that's always a bright spot for them.

But even with blend costs getting a lot cheaper recently because gasoline demand has been so bad, the arb hasn't really opened yet from ARA. So reformate, from what we've heard, has corrected down quite a bit. Heavy naphtha, which is a really valuable blend stock used to make gasoline, has come down about $50 in terms of premiums over the last few weeks. But even then, blenders are saying the stocks are healthy in the US. US is pretty well supplied. And we're not seeing a very attractive arbitrage situation.

Similar story in West Africa. So, typically, West Africa pulls a lot of gasoline from the ARA hub. Nigeria, the NNPC tends to buy in these monthly cycles. But as we've talked about a lot in this podcast, the Dangote refinery coming online, people's hopes are a little bit put on ice in terms of how much is going to continue going to Nigeria. Reportedly, the NNPC is going to be buying for July, and potentially August, but people are waiting and seeing for that. There has been less going to Nigeria over the last few months. So that's just a further downward pull on the European market. So, overall, I'd say the rest of the summer driving season is looking pretty bleak for gasoline traders.

Joel Hanley:

Well, it depends if they're long or short. You say things are improving, but as a consumer, they're improving if they go down. So for every long, there is a short, as they say. On the arb front, do you see any new opportunities or any interesting trade routes opening up or anything like that, Kelly, to help this situation in Europe?

Kelly Norways:

Yeah, well, one other recent outlet that we've seen has been from Russia. Russia had implemented a gasoline export ban, back in March, in an attempt to conserve domestic supplies. In part, due to an outage at the FCC unit at its large North Sea refinery, but also because of scaling drone attacks that it's been sustaining to its refining infrastructure, based on the scaling efforts from Ukraine throughout the year since January. So that export ban had been put in place from March through to May. But as stocks improved, that was lifted May 20th. And you're, as a result, starting to see some product flushed out of Russia. They don't typically export in large volumes. But, again, it's just adding to this supply side weakness or, yeah, flush of gasoline that's coming into the market. So, typically, we'd see Russia export around 300,000 to 500,000 metric tons per month of gasoline. That was even higher in 2023. So whether that starts to weigh on the market more significantly or not, depends on how long that temporary measure to roll back that export ban is kept in place.

Joel Hanley:

Right. And, presumably, that volume isn't coming to Europe so much as maybe, what, Latin America or the Middle East or Asia?

Kelly Norways:

Those are some outlets. We've also seen, potentially, some draw from West Africa, as they're waiting to start up their own domestic capacity that Matthew's mentioned. Yeah, we're hearing from traders in Russia that that export ban could potentially be reinstated. Well, originally, it was set to be reinstated in July. Now, the government are looking at assessing at the end of the month whether it needs to be put in place again at all. So I guess that's contributing to this ample supply picture that we're seeing, both in Russia and elsewhere.

And then, yeah, just lastly on Nigeria, all eyes on Dangote, and when it does start to produce its own gasoline supply. Its owners are now saying production should start from mid-July. There's some skepticism in the market about when that actually comes to fruition, just based on several previous rollbacks on expected production timelines. But, certainly, our analysts are saying Q3 for the first production is looking like a reasonable timeline. And the volumes that we start to see come out of that giant 650,000 barrel per day refinery will start small, but should, increasingly, chip away at those typical trade routes that we've seen from Europe, as we've mentioned.

Joel Hanley:

Yeah, possibly. I think just about every podcast we've had over the last few years has had some skepticism around the role and the ability of Dangote to furnish its local markets. And, of course, we're seeing interesting crude oil supply from the US, rather than from local Nigerian suppliers. So, yeah, always an interesting point in crude and in the gasoline markets.

Well, thank you very much, Kelly, and thank you, Matthew. And thank you for listening as well. Now you can stay ahead of the changing relationship between geopolitical risk and the price of oil with the Platts Energy Security Sentinel, an interactive editorial project, analyzing the factors that have helped insulate markets from the risk of supply disruptions. You can explore the Sentinel by visiting the link in the show notes. This episode of The Oil Markets podcast was produced in London by Felix Fernandez.