Gasoline markets are tightening, as rebounding road fuel demand looks set to outpace supply this summer.
Gasoline consumption in several European countries, including two of the largest that make data available, France and Germany, had returned to or exceeded pre-Covid levels by June. Demand in the US reached the highest ever at the start of last month at over 10mn b/d. US citizens and Europeans are likely to be taking holidays locally this summer given that international travel is still restricted amid rising cases of the Covid-19 delta variant and strict quarantine and other requirements. Summer road fuel demand typically peaks in the US and Europe in July, so the trend of firmer buying interest could continue and keep markets tight in August, although flooding in Europe could still cap consumption.
The pick-up in demand contributed to a sharp fall in inventories in northwest Europe last month, with independent gasoline stocks in the Amsterdam-Rotterdam-Antwerp hub dropping to an 18-month low of 871,000t as of 21 July, according to consultancy Insights Global. This is down by 34pc on the same time last year and 30pc lower than for 2019.
Output is stubbornly low. Euroilstock data show that EU-15 plus Norway refinery output was 9.02mn b/d in June, 13pc below the 10.33mn b/d produced in June 2019. The permanent loss of more than 600,000 b/d of European refining capacity since the start of the Covid-19 pandemic means that output will probably never return to 2019 levels. ExxonMobil's 120,000 b/d Slagen refinery in Norway is the fifth European refinery to completely close down since Covid-19 began. Refinery throughputs in the US are 6pc down on 2019 at around 16mn b/d. More than 1mn b/d of US capacity shut last year and, as in Europe, some of this is being converted to renewables projects.
An external factor applying pressure to US production this year is the high cost of complying with the federal Renewable Fuel Standard (RFS). Prices for renewable credits, or RINs, which obligated parties use to show compliance with the RFS, rose to historic highs this spring. With refiners unable to pass all of that cost on to customers, the most exposed have had to reduce runs.
Backward looking
Benchmark gasoline structures are in backwardation, where prompt prices are above forward values, indicating firm demand. The front-month gasoline swap in Europe was close to a $2.90/bl premium to the second month on 27 July — the highest since November 2019 (see graph). Backwardation on Nymex Rbob gasoline futures was nearly $1.40/bl on the same day, a nine-month high. In Singapore, prompt gasoline swaps were at a $1.60/bl premium to the second month, the firmest since December 2019. The market structure should encourage refiners to raise production and draw down inventories.
But Covid-19 travel restrictions in Asia-Pacific are still constraining road fuel demand in the region. China is rethinking its rules around products exports, posing a risk to supply. Vietnam reimposed a 14-day lockdown on 16 southern localities from 19 July, while Asia-Pacific's largest gasoline buyer, Indonesia, extended its 3-20 July lockdown to 25 July.
Refining margins in Asia-Pacific lag the Atlantic basin, but remain supported. Gasoline margins in Singapore averaged nearly $8.50/bl in July, up from $5.50/bl in June (see graph). Gasoline margins in Europe averaged nearly $11.85/bl last month, a two-year high. Notional refining margins are strongest in New York Harbor, where values, including Renewable Volume Obligation costs, averaged over $13/bl in July, also a two-year high.
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