Following some key developments, there are more downsides in the East of Suez market. For one, the capacity and complexity upgrades to the Balikpapan refinery have raised its CDU throughput, and the plant can now produce Euro 5-compliant gasoline. While Indonesia's imports hit a record weekly high of 540 kbd in June due to project delays, we expect the country's import requirements to decline as the upgraded 360 kbd facility ramps up. We expect a reversion to the mean, and that Southeast Asian balances will seasonally ease in Q3.  

Compounding this, reports indicate that China intends to export 46% more gasoline m/m at 980 kt this month. Meanwhile, the government is also reportedly considering a bumper 12 Mt clean oil product export quota award in September, which would bring the quota allocations to a record high of 45 Mt. It will not be easy to find an outlet for these cargoes, given the Dos Bocas startup and US West Coast stocks still 6% above typical averages. Northeast Asian refiners will also face renewed competition from the US Gulf Coast for Latin American buyers, as Panama Canal water levels have stabilized this year.

Gasoline 95r Singapore vs Dubai ($/bbl)

Source: PVM Data Services (Vienna), Argus Media (historical data), Kpler (forecasts)

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Naphtha: Both European and Asian naphtha cracks came in slightly stronger than anticipated for July, due to a variety of unplanned and unexpected supply and demand side factors. However, while we have revised naphtha cracks higher for NWE along much of the curve, we have maintained our forecast for Asian cracks in the front of the market. This is because of cracker outages in Japan and Taiwan and our expectation that operators in South Korea will be forced to trim runs by the end of the month as macro-economic weakness in Northeast Asia persists while US ethylene and polymer markets lengthen after unplanned tightening through July.

Gasoline: The recent momentum in the US gasoline market could soon turn, with the impending end of the driving season and because refiners have already responded by raising their yields and increasing supply. While Russia's decision to extend its gasoline export ban will have minimal impact, the pending ramp-up of the Dangote refinery will likely mean a net price decline. Meanwhile, the newly upgraded 360 kbd Balikpapan refinery will permanently reduce Indonesia's substantial import requirements. China's outsized gasoline export program this month and the prospect of a bumper export quota award next month will pressure FOB Singapore cracks as transpacific arbitrage opportunities remain scant.

Middle Distillates: West of Suez gasoil cracks will face continued pressure as ample cargoes and the end of the maintenance season add to Atlantic Basin balances. Russia's return to the spot market also exacerbates this issue, leaving more USGC cargoes available for NWE. In the East, China's demand struggles and talks of a bumper third export quota award in September signal that the cash market will be depressed for the foreseeable future. As for jet, while US demand has been exciting, this will ultimately be capped by high inventories and previously high yields. Demand elsewhere is similarly underwhelming, with sporting events not quite bolstering aviation activity as spectators took to alternative modes of transport.

Fuel Oil: Despite sluggish feedstock import demand, HSFO markets continue to find support in August from the seasonal strength in utility demand in the Middle East. From September, HSFO cracks should start to ease, stimulating incremental feedstock demand although slowing core product demand and weak refining margins may limit the upside to HSFO markets. By contrast, VLSFO markets are grappling with ample supply and sluggish bunker demand amid a growing fleet of scrubber-equipped ships.

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