A mild winter for European gasoline?
European gasoline margins remain unseasonably high heading into winter, despite a softening of market fundamentals in recent weeks. If cracks continue to hold at current levels, the European refining industry will be in for another strong winter.
Gasoline cracks to crude in Europe have been higher than historical averages by a sizeable margin this year, reaching record highs over the first three quarters. Eurobob non-oxy gasoline barge assessments averaged a premium of almost $21.40/bl to physical crude benchmark North Sea Dated between 1 January and 22 September this year. That is higher than the $19.40/bl premium to Dated over the same period in 2022, when geopolitical concerns lifted refined products margins in Europe sharply. It is significantly higher than the $9.62/bl average of 2021, and $3.72/bl premium of 2020, when Covid-19 restrictions weighed on markets. And it is also well above the $8.22/bl premium of 2019, before markets were rocked by a number of black swan events.
Premiums to crude for summer-grade non-oxy gasoline barges — which command a specification-led premium to their winter-grade counterparts — have been particularly high this year, peaking at over $33/bl towards the end of August. While that is lower than the $55/bl highs reached in June 2022, when octane tightness and pent-up demand from Covid-based lockdowns resulted in a surge in gasoline values, margins are holding higher this year as the transition to cheaper winter-grade material approaches. Eurobob non-oxy gasoline barge margins to crude were at $19.30/bl premiums to Dated on 22 September, the final day of summer-only assessments, noticeably higher than the $14/bl premiums on 22 September 2022.
During the last winter assessment period, Eurobob non-oxy gasoline barge margins to crude were also unseasonably high, averaging $14.25/bl from 28 September 2022-23 March 2023, levels typically reserved for the summer demand peak. Winter-grade premiums averaged just $1.85/bl in 2018-19 and $6.20/bl in 2019-20. Whether margins remain as high this winter as they did last year remains to be seen, but the market structure points to tighter fundamentals.
The October Eurobob swap priced at an average premium of $44/t to the November contract between 16 September and 22 September, higher than $34/t over the same days last year. In 2019, the same spread was just $20/t. A wider premium for earlier-loading product points to tighter fundamentals in the physical barge market.
The steeper premium for prompt gasoline compared with product for later delivery and unseasonably high cracks to crude come despite reports of falling gasoline demand in Europe in recent sessions, as well as a marked slowdown in shipments to Europe’s largest export partners, the US and west Africa. A higher prevalence of lighter, sweeter crudes at European refineries is also supporting output of lighter refined products, such as gasoline, which would typically weigh on margins to crude. But refinery run rates in Europe did not recover as much as they typically do during the summer, and that may be capping gasoline output and lending support. Refiners will also be prioritising middle distillate output over light ends where possible, given industry fears around tightness of diesel supply as the first winter without Russian product rapidly approaches. And the concentration of refinery maintenance on secondary units in Europe, particularly fluid catalytic crackers, which predominantly produce gasoline, will be lending marginal support.
Given Europe is broadly oversupplied in gasoline and needs to export around a third of its production, and that both domestic and export demand are fading rapidly — it begs the question, have gasoline cracks disassociated from market fundamentals to an extent, and has a new baseline for the product’s margin been set?
How gasoline cracks perform over this winter remains to be seen. But if levels continue to hold as they have and remain broadly unphased by weaker demand, the European refining industry may be set for another rare winter — in which plenty of money can be made from producing gasoline.
Author Elliot Radley, Editor
