Refinery Margins Weekly

Outlook

Naphtha:

• We continue to expect global naphtha cracks on average will be flat to slightly higher w/w before moderately and slowly easing from end-October
• There has been little structural change in the market over the past couple of weeks as tightening supplies continue to offset weakening blending and cracking demand
• In the West of Suez, supplies should modestly improve as refinery outages ease going forward and as blending demand continues to disappoint
• However, WoS cracks will find a floor of support next month from export demand to Asia and crackers favouring naphtha over LPG
• In the East of Suez, rising Middle Eastern refinery maintenance, lower regional output in Asia due to weak simple margins and falling Russian exports due to outages and run cuts will buoy fundamentals
• On the demand side, although we expect crackers to reduce operating rates in November m/m because of weakening base chemical demand, flexible units will continue to favour naphtha
• As such, cracks in Asia will be forced priced significantly above NWE levels to pull additional swings barrels from the Med and USGC over the rest of Q4

Gasoline:

• Atlantic Basin gasoline markets remain pressured by dwindling refinery maintenance and poor seasonal demand. Still falling US stocks and pockets of strength in the Med have added a floor of support under cracks.
• The first Dangote gasoline cargo movement within Nigeria suggests the refinery RFCC unit keeps ramping up and promises to depress European exports further.
• In the East of Suez, weakness in Chinese gasoline has lent the market a bearish spin in terms of sentiment, but we maintain a constructive outlook for the wider region as supply side issues and the seasonal uptick in demand will combine to keep the Asian gasoline balance in deficit in the months ahead.

Middle Distillates:

• The EoS gasoil/diesel market will hold steady as Chinese refiners are expected to have a muted November-loading program. However, sustained Middle Eastern and India cargo arrivals could erode premiums. There is more upside for higher sulfur gasoil amid refinery issues across Southeast Asia, particularly in Indonesia
• The WoS market continues to digest East of Suez product, which will continually pressure cracks. There is more downside if the transatlantic window re-opens later this month.

Heavy Distillates:

• West of Suez HSFO cracks continue to their gradual retreat from the recent rally in Northwest Europe as arbitrage supplies pile in. The downside, however, is limited by weak simple refining margins that is curbing HSFO output.
• Lower exports from Russia and elevated refinery turnarounds in the Middle East in November will keep HSFO markets in the East supported.
• VLSFO markets in the East of Suez should continue to soften amid adequate blend stock supplies and steady inflows into the Singapore hub.

Americas: USGC generally higher although a mixed bag for products

USGC benchmark refinery margins generally posted modest w/w increases across the complexity spectrum, the one exception being that of coker refineries where a firming market for medium sours led to a small w/w decline. The gains come despite refinery maintenance being on the downswing, as is also seen in the recovery in utilization rates, and so cracks should be under some additional pressure in the next weeks. However, the effect will be moderated by the fact that this has been a light maintenance season in the USGC to begin with. Further south, media reports citing Pemex documents indicate that refinery run rates in Mexico have been cut on unspecified outages and maintenance, but recent imports of clean products have still been down y/y, adding a bearish hue to implied demand. Additionally, the Dos Bocas refinery had not processed any crude in September according to the same report. Elsewhere, the island-wide power outages in Cuba have partly been the result of fuel and crude imports dwindling to a trickle, ailing power generation facilities and the lingering effects of Hurricane Milton. Cuba’s difficulties in receiving crude and products supply from Venezuela and Russia had seen Mexico step in last year to plug the gap, but newly installed president Scheinbaum has not stated publicly what her policy will be in this regard.

USGC: refinery margins ($/bbl)

Source: Kpler based on Argus Media

US: Weekly refinery utilisation (% vol)

Source: EIA

USGC naphtha cracks fell by $0.63/bbl to $2.36/bbl while being sustained by reduced run rates, globally tightening balances for the still in-demand petrochemical feedstock. Naphtha exports from the USGC in September reached the highest level since 2022, helping to explain exceptional strength in regional naphtha cracks lately. However, the easing of maintenance in Europe and the US will add to supplies in the WoS. However, with cracks for transportation fuels dragging on profitability, substantial run increases are unlikely in November in the US, meaning any drop in cracks will likely only be small.

The USGC 87 conventional gasoline crack increased by $0.75/bbl to $13.04/bbl and is only $2.40/bbl higher y/y. Gasoline is perhaps the one major product crack currently performing similarly to 2023. Indeed, PADD 1 inventories are now close to the five-year average. Overall stocks are the lowest for the year, as is typical for October. However, this is also being propelled by atypically low USGC inventories. Consequently, the USGC perhaps has more upside than PADD 1, especially if Latin American demand improves, as a long Northwest Europe can readily supply the Northeast Coast should the need arise.

US: Weekly PADD-3 gasoline inventories (Mbbls)

Source: EIA

Middle distillates cracks fell w/w with diesel (down $1.34/bbl to $16.20/bbl) leading the way over jet (down $1.30/bbl to $16.89/bbl). For PADD 2, agricultural demand is kicking in and drawing sharply from inventories, exacerbated by lower production due to the heavier maintenance in the Mid-West. Generally, though, diesel is following the typical demand patterns for this season albeit at a lower level (see chart below). The crack for heating oil futures remains in the doldrums and the outlook for the winter is poor because, although the seasonal average of heating oil consumption per household is to increase by 4% y/y this winter, households with the fuel as the primary heating source are set to drop by 4% y/y (EIA).

US: Weekly diesel supplied (Mbd)

Source: EIA

The HSFO crack rose by $0.44/bbl to -$1.25/bbl. The outlook is perhaps more positive than negative as the lower run rates in Mexico are supportive of USGC cracks and while maintenance is ending in the US, stocks remain extremely low. The VLSFO crack receded by $0.25/bbl but is still at a robust $7.81/bbl as the continued strength and pull in Asia cushions the US from any significant drops in value.

USGC product cracks (including RVO) based on Mars month 1 ($/bbl)

Source: Kpler using Argus Media prices

USGC product cracks (excluding RVO) based on Mars month 1 ($/bbl)

Source: Kpler using Argus Media prices

Europe & FSU: Margins hold on to their recent gains

Our benchmark European refining margins moved barely higher over the reporting week, in both NWE and the Med. Another refined product supply push is now imminent, with some 1 Mbd of primary distillation capacity in Europe returning in the next 2 weeks according to IIR forecasts (returning capacity will be more heavily concentrated in NWE). In neighboring markets, Russian crude intake is also set to rise by roughly 150 kbd m/m in November amid the conclusion of refinery t/a, which includes repair work at the Samara group of refineries as well as the winding down of maintenance activities at the 340 kbd Ryazan and the 95 kbd Ukhta plants, Argus Media reports. As such, we foresee refining margins slightly weakening over the next couple of weeks, with run cuts helping to keep the downside in check.

NWE Refining Margins ($/bbl)

Source: Kpler based on Argus Media

Med Refining Margins ($/bbl)

Source: Kpler based on Argus Media

Naphtha cracks added some $1.50/bbl w/w, in both key European regions. The abovementioned return of refining capacity should soon put an end to strength in naphtha cracks, but the fall should be moderate, given naphtha’s ongoing price advantage over propane at flexible feed crackers and weak simple margins, which should continue to curtail output. However, naphtha stocks in the ARA storage hub are now at a multi-year high, amid weak gasoline blending, which could render the envisaged downside a little more intense in NWE than in the Med (settling at record levels of 5.4 Mb over the week ending October 17th).

Gasoline cracks firmed by $3/bbl w/w, in both NWE and the Med. The last stage of seasonal refinery turnarounds is still lending support, but this factor is set to wane rather quickly. This dynamic should trigger stockbuilds in the ARA region, while not as precarious as naphtha stocks, they could soon see constant levels above the 5-year average, as inland demand remains lackluster. Elsewhere, Nigeria’s 650 kbd Dangote refinery has now successfully loaded and discharged its first seaborne cargo of gasoline to supply the domestic market via marine transport, which is another sign of Europe’s dwindling market share in WAF markets. As such, renewed weakness for European gasoline cracks seems likely in the upcoming weeks.

Gasoil/diesel cracks weakened marginally over the reporting week. Demand across Europe remains lackluster, highlighted by French road diesel deliveries, which were down by almost 5% y/y in September (Ufip), albeit offset by markedly rising heating oil deliveries in the country (+20% y/y in September). With refinery runs getting another boost in both Europe and Russia next month, on top of rising European imports, cracks could get pressured again in the near term (import volumes will need to be watched closely in the upcoming weeks). Meanwhile, the same batch of French Ufip data points to an increase of French jet fuel deliveries of some 5.7% by yearly comparison, pointing to solid air travel post-summer season. Nevertheless, seasonality now favors gasoil/diesel over jet/kero, which should keep the European regrade slightly below parity in the foreseeable future.

HSFO cracks eased just barely w/w, while still holding in historically elevated territory (see charts). The winding down of refinery turnarounds is now gradually pressuring fuel oil cracks at this elevated baseline, but weak simple margins and prospective run cuts should soon put a floor on the downside. Moreover, there are no coker unit outages reported for NWE and the European Med currently, as opposed to Russia where they amount to some 80 kbd of offline capacity, a dynamic which should keep feedstock demand intact.

NWE Cracks ($/bbl)

Source: Kpler based on Argus Media

Med Cracks ($/bbl)

Source: Kpler based on Argus Media

East of Suez: Asian margins climb but further gains will be harder to come by

Asia's benchmark refining margins moved higher in the week to October 21, with simple and gasoline focused setups posting the largest upsides as gasoil cracks came under renewed pressure. Simple refining margins saw the biggest upside, up nearly three-fold w/w as HSFO cracks climbed to near three-month highs.

Singapore Refining Margins ($/bbl)

Source: Kpler based on Argus Media  

Offline primary refining capacity in Asia rose 11% m/m to 2.8 Mbd in October but is due to drop to 2.3 Mbd in November, down 17% from the current month (IIR). Looking ahead, refining margins are likely to hold steady to higher as tightening regional balances offset increased product output from the lower refinery turnarounds. Our latest forecasts show Asian core product balances narrowing to a surplus of just 110 kbd in November, down 85% m/m and the narrowest surplus in three years. In December, we expect Asian balances to flip to a narrow deficit of 50 kbd.

Singapore Cracks ($/bbl)

Source: Kpler based on Argus Media  

Asia's naphtha crack lost 15% w/w to a one-week low of -$2.10/bbl but is still $17/bbl higher y/y. Despite sluggish Asian demand, weak simple refinery runs will help offset the erosion in demand from falling cracker rates next month, putting a floor under regional cracks. Lower Middle Eastern naphtha exports amid a near doubling in refinery maintenance activity to 1 Mbd in November will also help keep naphtha cracks supported. Meanwhile, Asian cracking margins have in part struggled due to a lower Russian refinery runs and outages which are weighing on exports of its discounted Russian naphtha exports.  

EoS: light distillates inventories level 4-week rolling average (Mbbls)

Source: PAJ, Enterprise Singapore, Foiz & Kpler  

The Singapore gasoline crack rose 10% w/w to $13.10/bbl. Overall, the outlook for gasoline in Asia remains constructive, as refinery issues affecting Taiwan, Malaysia and Indonesia remain unresolved, and the seasonal demand uptick expected from November will keep the region short in the near term. Indeed, Asian gasoline balances are seen extending their deficit from 85 kbd in October to 310 kbd and 375 kbd over the following two months, respectively. Having said that, improving gasoline export incentives from China could see an increase in Chinese exports which may reduce the above-mentioned Asian gasoline deficit. Gasoline cracks may also be buoyed by India’s Diwali festival later this month.  

Asia's gasoil/diesel crack fell to $12.40/bbl, down by 8% w/w and a hefty $16.60/bbl y/y lower. However, we believe a floor has been set for benchmark gasoil cracks, with a muted Chinese export program tightening a market already contending with 1.75 Mbd of CDU turnarounds this month (IIR). While Chinese refiners could surpass their gasoil export allocations for this month, current export margin incentives indicate limited upside. Also, rising Australian imports, driven by the approach of summer and expected seasonal consumption highs, are adding further support.

EoS: middle distillates inventories level 4-week rolling average (Mbbls)

Source: PAJ, Enterprise Singapore, Foiz & Kpler

Meanwhile, the jet/kero crack was unchanged w/w at $12.70/bbl, flipping the regrade to a two-month high premium of $0.35/bbl. The outlook for jet markets is also constructive as limited South Korean exports tighten supplies ahead of the year-end holiday season which should help offset China's firm jet exports.  

Asia's HSFO crack was the biggest gainer last week, climbing 32% w/w to -$4.50/bbl. The near-term outlook is steady from here for HSFO cracks as increased post-summer Middle Eastern supply helps offset declines in exports from Russia. Lower feedstock demand in China is also set to weigh on regional HSFO cracks as independent refiners grapple with weak refining margins and policy uncertainty around plans to reduce tax rebates. But the downside is likely to be limited by robust bunkering demand for HSFO as well as weak simple refining margins.  

EoS: residues inventories level 4-week rolling average (Mbbls)

Source: PAJ, Enterprise Singapore, Foiz & Kpler

Lastly, the VLSFO crack slipped 3% w/w to $11.50/bbl and the coming weeks should see some further weakness as supply continues to improve. VLSFO floating inventories around the Singapore hub rebounded from more than one-year lows of 1.3 Mt to 1.65 Mt in the week to October 20 as arbitrage cargoes continued to spill in. Fresh exports of ‘Meleck’ heavy sweet crude oil from Niger are helping fill the gap left by South Sudan's Dar Crude. Moreover, reduced secondary unit runs are also translating into increased blend stock supplies for the VLSFO bunker pool.

Charts

USGC: Coker conversion refinery margins for different feeds ($/bbl)  

Source: Kpler based on Argus Media       

NWE: Coker conversion refinery margins for different feeds ($/bbl)  

Source: Kpler based on Argus Media      

Med: Coker conversion refinery margins for different feeds ($/bbl)  

Source: Kpler based on Argus Media       

SG: Coker conversion refinery margins for different feeds ($/bbl)   

Source: Kpler based on Argus Media        

Refining Margins Complexity weighted (5DMA, $/bbl)  

Source: Kpler based on Argus Media 

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