Driving Discussions: Is Europe's gasoline abundance a problem?

Benedict: Hello and welcome to this podcast created by the Argus European Products team. This is part of the "Driving Discussions" series of podcasts on what's happening today, and what we think might happen in the future for European transport fuel markets. My name is Benedict George. I'm the editor of the Argus European Products report. And I have with me today, Atishya Nayak, reporter on the European gasoline market. Thank you very much for being with us today, Atishya.

Atishya: Thanks, Benedict. Happy to be here.

Benedict: What we're going to talk about today is this enormous pile up of gasoline supply in Northwest Europe that we've seen emerge over the last few months. We want to get into why this has happened, and what might happen in the future to all of this gasoline that's sitting in tax.

Atishya: So essentially what we've seen is recently that stocks in Northwest Europe have just increased dramatically. We saw about 10 weeks of increases from middle of January. We started to see stocks reach record highs for four consecutive weeks. And the main reason for this that we estimate is the loss of the West African market as an offloading destination for gasoline. Now, Dangote started production of gasoline in September of 2024.

Benedict: And Dangote is this huge 650,000-barrel-per-day refinery that came online during last year in Nigeria in a context where Nigeria had very little, practically no functional refining capacity.

Atishya: There was some skepticism around how efficient this production was going to be early on. But from November onwards, we started to see crude receipts at Dangote increased. And from around December, they have maintained sort of a 60% to 65% crude intake, just going off of Vortexa data. So as West Africa is one of Europe's largest export destinations for gasoline, right after the U.S., we have seen an average 1 million tons per month of gasoline going to Nigeria. In December, we saw that drop to about 250,000 tons, and it has sort of maintained that level since.

Benedict: Dangote is probably producing about 200,000 barrels per day of gasoline at the moment, because it's receiving 400,000 to 500,000 barrels per day of crude. And with it is residual fluid catalytic cracker, RFCC, running. It says that it can produce a gasoline yield of 50%. So probably making about 200,000 barrels per day of gasoline. And that matches up quite closely to the difference between the volume of gasoline that Europe was exporting to Nigeria two years ago versus today. Europe is exporting roughly 200,000 barrels per day less. So that's a sort of...you know, it's not a coincidence, but those numbers are very similar. Although we know that there have been lots of other factors along the way, apart from the startup of the Dangote refinery.

So back in 2023, the volume of gasoline that Europe was exporting to Nigeria already fell a lot even before Dangote had started up, because the Nigerian government withdrew the subsidy for gasoline in Nigeria, which effectively made the product much more expensive. And the Nigerian government also floated the Naira against international currencies. That precipitated a steep decline in the Naira's value, also effectively making gasoline...among other imported products, made gasoline much more expensive for people in Nigeria. So it was no surprise that even before Dangote had started up, the volume of gasoline Europe was selling to Nigeria fell a lot. But nevertheless, it's not a coincidence that the difference between what Europe is supplying now and what it was supplying two years ago is roughly the volume that we think Dangote is producing today.

Atishya: I think in addition, later last year, post-summer, Nigeria also changed the import fuel standards within the country. So essentially, it now allows 50 ppm sulphur for refined products, even for imports. And earlier, this used to be 200 ppm. It used to be about 1,000 ppm as well. And this sort of happened in conjunction with the Netherlands as well as Belgium, which accounted for over 70% of European exports to the country. They brought in legislations as well that basically imply that export quality of refined products would be the same as the Euro 5 standards that we see here in Northwest Europe, which obviously has also cut into the export volumes to West Africa. Now, this has obviously led to a lot of excess stocks in ARA because we've lost such a large chunk of the export market that West Africa held before.

Benedict: When we talk about stocks, we're primarily talking about Amsterdam, Rotterdam, and Antwerp, the ARA refining and trading hub. That's where we have the most regular data on the stock levels.

Atishya: Now, a lot of this product that is in ARA, so traders estimate some of it to be higher sulphur, though not a lot of it. And if the product is higher sulphur, it basically makes it a lot harder to bring sulphur content down. It's a time-taking process as well as an expensive one, which is basically discouraging blenders and refiners to reprocess this stuff and to maybe export it somewhere else, such as the U.S., or even use it domestically within Europe.

Benedict: Absolutely. And it's not even clear that there's the capacity to do that, de-sulphurisation. I think traders seem divided, don't they, about whether the market would have or should have already adjusted to the changing sulphur rules. This all changed last year or even, in the case of the Netherlands, before. So some traders say the market has already adjusted to this. And why would people be sitting around today on all this high sulphur stuff in Northwest Europe when six months ago they already knew that it was not going to be allowed to export this stuff? And that makes sense.

However, ARA tends to be a sort of catch-all destination for product that people don't know what to do with. Like at the beginning of COVID, products from all over the world were travelling to ARA, and huge volumes in stockpiles were ballooning at ARA because people have faith, traders have faith, that they will find something to do with their product at ARA when they can't find anything else to do with it. You know, they're right, they can. We should say as well that we have visibility on the stock volume, the total stock volume. We don't have visibility on the quality, the specification of all of the material in these stocks. So there's a lot of speculation, therefore, about the value or otherwise of the product that's currently in these tanks.

Atishya: Even on expanding for gasoline, absolutely, because a part of the stocks at ARA also account for blending component storage. And we're never really 100% sure on how much of it would account for blending components or what blending components these would imply as well.

Benedict: Gasoline is a very broad church, right? Lots of things could be labelled as gasoline and they could be chemically very, very different things with very different prices. Although there is this argument that the sulphur rules in Nigeria already changed months and months and months ago, and that sulphur rules in Northwest Europe changed already months and months ago. There's still an argument perhaps that there are qualities of gasoline and blending components in Northwest Europe which have only just recently lost their export market because they are not...their problem is not their sulphur content, but rather, for example, their density.

So in Europe, if you have a very dense gasoline blending component, that's a very low-value product because you get fewer liters for your ton of material. Whereas, this used to have a much more profitable market in, for example, Nigeria because Nigeria is one of the countries that traders will sell to on a mass basis, so it will tend to be easier to negotiate a higher premium for your dense material into Nigeria, into the Nigerian market, because you can price it on a per-ton basis, versus trying to sell it inside Europe where you have to sell it on a liter basis, and you haven't got very many liters because it's very dense. There are also various impurities. There are lots of points of specification which it may be difficult to blend into European gasoline. For example, aromatics, these could be contributing to the build-up of product to ARA.

Atishya: And this goes beyond West Africa as well. So the U.S. has increasingly become more self-reliant. The transatlantic arbitrage was not as competitive to the U.S. Atlantic coast all of 2024. And in the peak demand season, which is the summer driving season in the U.S., we saw some record lows for export volumes to the U.S. Atlantic coast.

Benedict: Last year, there was real sense that the market's expectation of summer demand and summer pricing fell off a cliff when the summer actually arrived, didn't it?

Atishya: Yes, there was a lot of expectations for 2024, but we did not see that materialized. But the expectation now has become that this summer is more than likely to be the same as last. And this is probably what the demand picture is going to look like from the U.S. So we're going to see a largely less competitive transatlantic arbitrage as compared to the U.S. Gulf Coast to Atlantic coast arbitrage opportunity. So pre-pandemic levels, the average U.S. demand was estimated at about 9.4 million barrels per day during the driving season. But in 2024, we actually saw it 400,000 barrels per day lower.

Benedict: Import volumes versus total demand can be difficult to sort of get your head around because suppose a country imports 10% of what it consumes, and then its demand falls by 5%, it will now import 50% less. So a change in demand translates into a much greater proportional change in imports. If the U.S. just...you know, the numbers you're giving there are something like as much as 5% or so lower domestic gasoline demand in the U.S. versus before COVID. That will make in theory a massive difference to the volume of gasoline that the U.S. needs to import. And that will be very bearish for European gasoline prices.

There's been a lot of uncertainty in the last couple of weeks...well, the last couple of months, I suppose, around transatlantic oil trade because Donald Trump has said that he's putting tariffs on Canadian and Mexican oil. And then he says he's not going to do it, and then he says he's going to do it again, and then he actually does it, and then he says actually it's not happening after all. So everyone's been a good deal confused, I think, about how transatlantic oil trade is going to look in the future. We have a podcast, so do have a listen to that if you want some of the hypotheticals talked through. Atishya, is there any other market waiting in the wings?

Atishya: There is an argument that more could head to Latin America. There is a steady flow from Europe to certain Latin American countries, but the volume itself is a lot lower than what we have seen West Africa pull altogether, as well as just Nigeria because it consumes so much even within West Africa. Libya is another destination. An interesting thing I've heard is that East African specifications for gasoline are not as different, so that could become a market going forward.

Benedict: We heard, didn't we, that Kenya and Mozambique are both mass markets rather than volume markets, if that terminology makes sense. That traders in Europe can sell per ton to those markets rather than per cubic meter or per volume, which makes it more profitable or easier to negotiate a higher premium for denser material. Lots of these different markets in North Africa, East Africa, Latin America, they trade a lot of oil products with Russia at the moment. Because the EU and the U.S. don't buy Russian refined oil products, Russian refined oil products are much cheaper. In theory, if the EU and the U.S. were to buy Russian refined oil products again, maybe it becomes easier for Northwest European gasoline to compete on price in places like Latin America and North Africa.

There's another factor in the background contributing to this overhang of gasoline supply, as well as the loss of a lot of the West African markets. That's the issue of changing crude diet at European refiners. How has that changed, Atishya, in the last few years?

Atishya: Post the loss of Russian crude in Europe, we have now seen 68% of total crude intakes have now become lighter grades compared to if we look at an average for 2021, we would stay between a 40% to 50% of total at that time, according to Kepler. Basically, just producing a lot more NAFTA. Of course, a large chunk of this NAFTA is processed into the gasoline pool.

Benedict: We've downloaded some of this crude receipt data. We've combined this with crude assays for each grade from Haverly Systems, which have a huge library of crude assays. We can actually break down the volume weighted average, overall API density in sulfur content, and even the overall expected distillation yield of heavy and light NAFTA, and so on. The story, as you say, is that European crude receipts have gotten much, much lighter, and have yielded more and more NAFTA over the last few years. Even before most of Europe, excluded Russian crude, Europe was already importing much more light sweet crude from the U.S. Gulf Coast because the shale boom had really kicked off in the mid 2010s. Lots of extra NAFTA, as you say, probably lots of extra gasoline as well.

On the NAFTA side, there's simultaneously a demand problem because Europe has been closing down its steam crackers. The NAFTA that you don't put into the gasoline blending pool or upgrading pool, usually you try and steam crack, and make petrochemicals and plastics and so forth. But Europe has been doing much less of this, and shutting down these steam crackers that are no longer cost-competitive against Asian crackers, basically. There's a story there. Europe's losing demand for all these lighter products at the same time as producing more and more of them. What we're looking at is a huge pile-up of gasoline supply in Northwest Europe. Not much of a market for it in West Africa, not much of a market for it in the U.S. That sounds very bearish, doesn't it? Is there anywhere that this gasoline could go? Is there anyone waiting to use this gasoline?

Atishya: Even though largely this remains a bearish picture, we've actually seen increased domestic demand in Europe. Gasoline demand has farmed. It's not just that we see consumers buying less diesel vehicles. There is about, if I'm not wrong, 2024, so 2% rise in registrations for petrol vehicles. There was also an increase in hybrid and plug-in hybrid vehicles in all of the EU. Plug-in hybrid and hybrid vehicles in Europe are largely gasoline vehicles.

Benedict: The 2024 new vehicle sales statistics in France and the UK have 10 to 1 more gasoline and gasoline hybrid than diesel and diesel hybrid. It's hard to exaggerate how unpopular diesel is in Northwest Europe with consumers now. Such a large proportion of Europe's consumers live in Germany, France, the UK, the low countries. Maybe the traders in Northwest Europe know what they're doing and they're stocking up all this gasoline because Europeans with all their new gasoline and gasoline hybrid cars are going to use it.

I guess the other thing that's going to happen is that refineries are looking at all of this supply, and they're having the same thoughts that we're having. So refineries are considering shutting down altogether. Shell is shutting its Wesseling refinery in Western Germany permanently. Petroineos is shutting the Grangemouth refinery in Scotland later in the second quarter of the year. BP is going to shut one of the distillation units at the Gelsenkirchen refinery in Western Germany as well. So this is why refineries are shutting down, because there's all of this product and there's not enough demand for it. So maybe prices can readjust after production has been told. Maybe there's an element of insurance. Maybe some traders are putting away gasoline in storage in ARA so that they're confident of having it available in a few months time when two of the refineries in Northwest Europe have shut down.

That's probably all we've got time for today.

Atishya: Okay. Yes.

Benedict: Thanks very much, Atishya. Thanks for talking these issues through. Very interesting.

Atishya: Absolutely. Happy to have done so.

Benedict: And thanks very much to everyone listening. I hope this was a helpful conversation to listen to. Keep an eye out for future podcasts we release on this sort of curious development in the European transport fuel markets. So we hope to catch you again soon. So have a lovely day.