US gasoline crack spreads weaken, while Europe, Asia rise on supply tightness

By Jeff Mower, Rob Sheridan, Irene Tang

February 3 - Gasoline crack spreads in the US have diverged from European and Asian cracks in recent weeks, as high inventories and low demand have put downward pressure on the US. The rest of the world's gasoline markets are looking more bullish, with crack spreads in both Europe and Asia on the rise.

The March NYMEX RBOB crack spread settled at $7.52/barrel February 2, down from $9.06/b on January 25. Losses were less pronounced in the forward months. The April crack spread fell to $11.58/b from $12.34/b over the same period, and the July crack to $10.36/b from $10.56/b.

The price premium in the outer months to March reflects a switch to more expensive summer grade gasoline, and, traditionally, comparatively higher demand. (See a related chart on US gasoline demand.)

Weakness in prompt physical crack spreads have been more pronounced, however. The NYMEX RBOB crack spread compares New York-basis RBOB to Cushing, Oklahoma-basis WTI crude, and thus may not accurately reflect Atlantic Coast gasoline fundamentals. (Listen to a related podcast: US gasoline crack spreads weaken).

Using a delivered Bonny Light crude price, the prompt RBOB crack spread was at $2.83/b February 2, down from $3.49/b on January 25, according to Platts data. The Chicago RBOB crack (WTI basis) fell to $6.42/b from $9.11/b over the same period, and the Los Angeles CARBOB crack (ANS basis) to $9.83/b from $13.07/b.

The RBOB contango has also widened recently. The March/April NYMEX RBOB spread settled at minus 10.84 cents/gal on February 2, from minus 8.84 cents/gal on January 25. Over the same period, the March/July spread has widened to minus 12.02 cents/gal from 8.74 cents/gal.

US gasoline demand has been sluggish for well over a year, and inventories have been rising as a result.

US gasoline inventories climbed to 229.43 million barrels the week ending January 22 from 206.95 million barrels the week ending October 16, according to the US Energy Information Administration.

That gasoline inventories are climbing at this time of year is no surprise; historically, stocks tend to rebuild following the end of peak summer driving season, and then taper off during the spring as refinery maintenance lowers production and winter specification barrels are consumed. (See a related chart on US gasoline stocks.)

What makes the winter of 2010 different is the surplus of barrels. The week ending January 22, US inventories were 10.6 million barrels above the five-year average, up from an 8.99 million barrel surplus at the end of December.

However, that surplus was quickly reduced the week ending January 29. US gasoline stocks fell just 1.31 million barrels to 228.12 million barrels, but the surplus against the five-year average shrank to 6.58 million barrels, the EIA data showed.

Gasoline inventories had been climbing at a rapid pace through most of the month. Between the week ending January 1 and January 22, inventories rose on average 3.366 million b/d, compared to a five-year average of 2.958 million b/d.

And the surplus was growing even while gasoline production and imports remain low. But if the stock draw for the week ending January 29 is an indication of a trend reversal, and not just a one-off event, it appears as if low gasoline production is outweighing low demand. (See a related chart on US gasoline imports.)

That 1.31 million barrel stock draw was the result of low production--imports actually rose that week, while demand remained sluggish.

Production at 8.58 million b/d the week ending January 29 was 142,800 b/d below the five-year average, according to the EIA, while imports at 823,000 b/d were 67,000 below the five-year average.

Historically US gasoline inventories decline during the middle of the first quarter, before rising again ahead of the peak summer demand period. Over the past five years, between mid-February and mid-May US gasoline inventories fell on average 1.41 million barrels a week.

That gasoline stocks appearing to be on the decline a bit early this year could be bullish for US crack spreads. But even if these draws chip away at the surplus, US refiners can up runs to meet any rise in demand. Refiners are currently only operating at 77.7% of capacity, the lowest since Hurricanes Gustave and Ike sent operating rates to 66.71% breifly in September 2008.

While US refiners can up production, total capacity has shrunk because of poor margins. For instance, most recently, Sunoco said it was permanently shutting its 145,000 b/d Eagle Point refinery in New Jersey. This follows the shutting down of Valero's Delaware City, Delaware refinery.

Assuming gasoline demand rises, this means the US will be more dependent on imports. In Europe, capacity has shrunk as well, with French major Total shutting its Dunkirk refinery.

But there should be no shortage of gasoline imports, globally speaking. India's Reliance said in January it operated its new export-oriented 580,000 b/d Jamnagar refinery at 115% of capacity in October-December 2009, while the company's older 660,000 b/d plan was operating at 100%.

Average operating rates in North America were 81.6%, in Europe 76.4% and in Asia 81.6%, Reliance said.

Still, overseas the gasoline picture is more bullish.

The front-month Northwest European premium unleaded swap crack spread (basis Brent) has been steadily climbing since mid-December, to $8.20/b on January 29 from $4.20/b on December 17.

The Northwest European contango structure has narrowed significantly, to $1.50/mt per month from $6/mt per month at the start of the year.

"January is often the weakest month of the year, so you expect the market to be in contango then, but February-March has [become] fairly flat," said one market source.

Gasoline volumes have been bought up in the Northwest European barge market as part of the first quarter West African tender, with between 14 and 18 gasoline cargoes slated to be delivered CIF Lagos during February.

In addition, there has been a flow of gasoline eastwards, from the Mediterranean and Northwest Europe, due to demand in the Persian Gulf, said sources.

And inventories are not as flush in Europe. According to news reports citing Euroilstock data, European gasoline inventories in December at 117.56 million barrels were up 1.2% on November, but down 5.7% year-on-year.

A steep contango in mid-January lured some gasoline barrels into floating storage in Europe. Oil trading group Noble fixed at least five Long Range vessels as floating storage for gasoline and blendstocks, with the bulk of the barrels coming from Reliance.

But sources at the time said the ships were fixed partially in response to a lack of available storage in Asia, and no similar fixtures were heard since then.

In Asia, gasoline crack spreads are soaring. The benchmark Singapore 92 RON crack against Brent climbed to a one-year high of $11.45/b on February 2 on continued prompt tightness. The Arab Gulf 95 RON crack against Dubai was at $12.19/b February 2, up from $5.65/b in early January.

Traders have cited strong Indonesian demand, and Mideast demand, and tight supplies. As with the US and Europe, Asian refiners (apart from Reliance) are operating below capacity.

Most recently, Japan's Cosmo Oil said February 1 it will cut its total nameplate refining capacity by 12.6% or 80,000 b/d to 555,000 b/d effective immediately. The decision comes amid a sustained sharp decline in Japan's refined products demand over the past few years.

Meanwhile, market sources said February 1 that Saudi Aramco is resuming gasoline imports in February, after having skipped imports for three months.

The resumption of imports is driven by higher domestic consumption, led primarily by reconstruction works following the massive floods last November.

Looking ahead, Aramco is expected to continue importing gasoline in March because of the upcoming complete turnaround of its joint venture 400,000 b/d Samref refinery in Yanbu that will last for at least 45 days from March.