Asia outlook dims on gasoline availability

Asia is likely to maintain its weakness as negative implied demand data from China, fewer Japanese imports and greater refinery unit availability pressure the market. While RBOB has seen an uptick in differentials this should ease making the NWE arbitrage less workable as the season winds down, although a tighter Med market remains a bright spot.  

Gasoline continues to underperform and its apparent weakness contrasts nicely with naphtha as reforming margins have been under pressure. Although, naphtha strength will become less relevant with the quality switch in September when butane becomes the preferred blendstock. In a similar vein, the tight market and consequent rising differentials for VGO in Europe could reduce the margins on FCCs units and lower gasoline production in the short term.  

NWE has been afflicted by middling blending and export demand and the arbitrage to the US has been skittish. This has translated into fewer departures destined for PADD 1 m/m. While there has been some strength in the US PADD 1 in terms of differentials, this should ease off as the season winds down. Indeed, cracks in the USGC have dropped sharply this week. PADD 1 refinery utilization dropped to 85% according to the latest EIA data, the lowest level since May. However, overall gasoline production in PADD 1 only fell by 28 kbd to 3.27 Mbd, a figure comparable to previous years. While cracks for gasoline have been lower this summer y/y, the bearish sentiment is perhaps overdone especially given recent demand data.  

Gasoline cracks

Source: Kpler based on price data from Argus Media

The Mediterranean looks to be tighter with overall gasoline waterborne loadings in the region at 350 kbd so far in August compared to 406 kbd in July. This tighter market has seen a modest recovery in the in the gasoline crack which has averaged around $12/bbl so far in August compared to $9/bbl for July. Maintenance in September, albeit lighter than previous years, raises the prospect that this strength will persist. The extension of the ban on Russian gasoline exports until the end of 2024, while minor in likely effect, could bring back additional demand from Libya to the open market.

It is a similar story in the Asian market where the narrow reforming margin is indicative of a market underperforming. At the prompt there is still some weakness with cash differentials to the August swap negative for much of this week (Argus). That being said the August/September swap structure remains in a slight backwardation between $0.15/bbl and $0.40/bbl over the last five days. With strong gasoline demand in India lately, July gasoline sales was up 10.5% y/y according to the Petroleum Planning and Analysis Cell, there is some expectation for this to continue. However, the current rate of exports in August is around 300 kbd, up around 50 kbd from July, so even greater demand internally may not stem exports mainly bound for the Middle East and Africa.

Weakness in Northeast Asia could be mitigated by the news that that ENEOS’ 210 kbd Kashima refinery had halted due to an unspecified issue. Notwithstanding further unexpected outages, Japanese imports, principally from South Korea, should ease in September as Japan become close to balanced for gasoline supply and demand. South Korean net exports have been rangebound lately between 275-340 kbd since April and barring run cuts this should be sustained until S-Oil refinery in Onsan goes into maintenance at the end of September according to data from IIR.

It is bearish picture in China where offline primary distillation and FCC capacity is looking to be fairly light in September compared to recent months. Indeed, this is the trend for Asia as a whole. In the short term there are indications that gasoline demand in China is lower than previous years. According to an industry report, there was a fourth weekly decline in congestion at major cities, a departure from seasonal patterns. This bearishness contrasts with some of the storage data. Commercial inventories, which does not include NOC holdings, remain stable and low in relation to recent years according to Mysteel Oilchem. This suggests that should internal demand continue to slip, pressure to export may take some time to build up. Additionally actual exports up to the 15th of August would be close 750kt for the whole month assuming this rate is maintained rather than the near 1 million Mt that the market had anticipated.

Chinese gasoline commercial inventories (Mbbls)

Source: Mysteel OilChem

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