WoS refining margins tumble further, Asia finds support

Market and Trading Calls

Light Ends:

• Naphtha cracks East of Suez will find support as new cracker startups in China and Indonesia improve demand in the region. Increasing Middle Eastern refinery maintenance will also support cracks through H2 March. Russian naphtha exports are also due to tick down after a strong Jan and Feb.
• Cracks West of Suez have less upside amid muted petchem and European gasoline exports, but will enjoy some support as March progresses thanks to increasing refinery maintenance in the region and a seasonal uptick in blending demand.

Gasoline:

• Tariffs lose momentum: The one-month delay on U.S. tariffs for Mexico and Canada ensures WoS flows remain uninterrupted.
• Dangote's crude supply snags: Fresh procurement challenges at Dangote could constrain refinery runs, tightening the market ahead of peak summer demand.
• Indonesia’s Eid demand falters: Seasonal demand for Eid al-Fitr appears weaker than usual, likely falling short of the typical 12-13 Mbbls import volumes.

Middle Distillates:

• A more workable US arbitrage to Europe to pressure the ULSD cargo market but pervasive uncertainty and increased risk due to the changeable status of tariffs is adding caution to Transatlantic supply.
• There is some bullishness for the wider Atlantic Basin as Brazilian demand seasonally increases and lifts imports.
• Asian markets continue to look constructive, and maintenance and arbitrages West should sustain cracks for gasoil.

Heavy Distillates:

• Asia’s HSFO crack jumped to a three-year high premium last week amid concerns of widespread supply shortfalls and this bullish momentum will be sustained for over the near term as Russian exports remain depressed and US waivers on Iraqi gas imports expired on March 8, paving the way for reduced Iraqi loadings.
• US and European HSFO markets will also firm as competition for prompt supplies intensifies from Asia.
• By contrast, ample supply and sluggish demand continues to dominate global VLSFO markets, leaving little prospects for near term upside. Concluding maintenance at Kuwait’s Al Zour will only add to an already oversupplied market.
• The opposing trends dragged Asia’s Hi-5 spread to record lows last week and the spread will remain pressured across all key regions over the coming weeks.

Americas: Weakening distillate cracks pressure USGC refining margins

US Gulf Coast (USGC) refining margins extended their decline for a third consecutive week, primarily weighed down by weakening distillate cracks. Margins for complex refineries (equipped with cokers, hydrocrackers, and FCC units) declined by $0.85/bbl (-6%) w/w, averaging $12.50/bbl. Meanwhile, simple refinery margins saw a more modest drop of $0.10/bbl (-2%) w/w to $4.30/bbl, according to our calculations based on Argus Media pricing data. As spring break travel increases in early to mid-March, transportation fuel cracks may receive short-term support, potentially offering a modest uplift to refining margins.

USGC refinery margins ($/bbl)

Source: Kpler calculations based on Argus Media data

USGC gasoline cracks, excluding RVO, increased by $0.75/bbl w/w to an average of $8.90/bbl, while RVO-included cracks gained $0.50/bbl w/w to $13.60/bbl. US implied domestic demand surged by 420 kbd w/w to 8.9 Mbd, making the highest level since late December (EIA). Concurrently, production increased 470 kbd w/w to 9.5 Mbd, also a post-December high. This balance between production and demand suggests that gasoline cracks are likely to remain stable in the coming weeks, with seasonal trends offering additional upside potential.

US gasoline production (Mbd)

Source: EIA

USGC ultra-low sulfur diesel (ULSD) cracks, excluding RVO, declined by $2.15/bbl w/w to an average of $18.40/bbl, while RVO-included cracks fell by $2.40/bbl w/w to $23.05/bbl. Meanwhile, the spread between USGC gasoline and ULSD widened by $20/t, flipping into positive territory. US implied diesel demand (4-week average) dropped by 250 kbd over two consecutive weeks through February 28 (EIA), though it remains well above seasonal levels from the past two years. While domestic demand appears to be softening, a potential increase in exports this month will help offset some downside pressure on diesel cracks.

US implied diesel demand (Mbd, 4-week average)

Source: EIA

USGC jet fuel cracks outperformed ULSD, with the regrade rising by $1.45/bbl w/w to an average of $0.75/bbl. US implied jet fuel demand averaged 1.5 Mbd in February, reflecting a decline of 80 kbd m/m and 220 kbd below December levels (EIA). Jet fuel inventories built 2.9 Mbbls over the month, maintaining five-year highs, which will limit further upside in the regrade.

USGC high sulfur fuel oil (HSFO) cracks fell by $1.55/bbl w/w, averaging -$6.05/bbl. US fuel oil stocks increased by 590 kb w/w in the week ending February 28, following an 840 kb build in the prior week (EIA). Implied fuel oil consumption declined 95 kbd m/m, partially reflecting weaker bunker demand amid a slower shipping season.

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

Source: Kpler calculations based on Argus Media data

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

Source: Kpler calculations based on Argus Media data

Europe & FSU: Margins take a tumble over the reporting week

Our benchmark European refining margins nosedived over the reporting week, with simple margins falling, once again, into unprofitable territory. This brings refinery run cuts back into focus, which should soon provide a floor under margins. Moreover, maintenance activities will moderately heat up again in the coming weeks, especially in Russia, which should help margins recover some lost ground, when also considering a gradual uptick in refined products demand. In terms of US tariffs, the impact on European product markets remains difficult to judge at this point but they should be largely bullish to European refining margins. Indeed, if USGC refiners were to cut runs due to higher Canadian and Mexican crude input costs, it should strengthen the transatlantic pull of European gasoline barrels, and, at the same time, lead to weaker arbitrage economics for European traders when importing gasoil/diesel from the US.

NWE Refining Margins ($/bbl)

Source: Kpler based on Argus Media

Med Refining Margins ($/bbl)

Source: Kpler based on Argus Media

Naphtha cracks shed $1.50/bbl w/w, settling at negative $3.50/bbl in NWE and negative $8.00/bbl in the Med. The severe lull in European gasoline exports is hurting blending demand. However, the seasonal factor is now soon coming into play, which should lift demand for naphtha as a blendstock. Slightly heavier refinery maintenance from late-March vs now should also propel naphtha cracks higher, but near-term upside remains limited given that flexible crackers in Europe still favor LPG.

Gasoline cracks lost a sizeable $4.50/bbl in both key European regions, falling to exceptionally low levels of $2.50/bbl and $2/bbl, respectively. Indeed, gasoline exports out of the larger region continue to chart new lows, severely eroding sentiment. While tariffs could see more cargoes arriving from Europe, they are unlikely to appreciably alter trade flows in the short term. This is also reflected by the market’s negative response, possibly assessing potential tariffs as posturing at this point (tariffs have been temporarily lifted now). Elsewhere, Russia has extended its gasoline export controls until August, which will likely keep exports around the 50 kbd mark, which will have limited impact on fundamentals in the wider region.

Gasoil/diesel cracks decreased by $1.00/bbl to $20/bbl in NWE and to $16.50/bbl in the Med, both w/w. Middle distillates will likely remain moderately pressured given prospects of a slight rebound for imports from weak January and February levels. As previously mentioned, the impact of tariffs has been negligible so far but if they were implemented for the longer term, we could see some disruptions to flows and freight rates in the Atlantic Basin, which would ultimately be bullish to European middle distillate values.

HSFO cracks dropped by $1.50/bbl w/w to negative $5/bbl in NWE and to negative $9.50/bbl in the Med. Recent strength in cracks is, in part, attributable to record low Russian fuel oil exports, which fell to 820 kbd in February (-70 kbd m/m, -150 kbd y/y). Exports should bounce back moderately over March, but domestic maintenance activities will heat up again over April, which should keep fuel oil markets relatively tight for the time being. Moreover, poor simple margins in Europe are likely to provide a floor under cracks and should propel them a little higher again.

NWE Cracks ($/bbl)  

Source: Kpler based on Argus Media

Med Cracks ($/bbl)

Source: Kpler based on Argus Media

East of Suez: Positive HSFO crack and ramping up maintenance support refinery margins

Our benchmark refinery margins increased sharply w/w, by as much as $2.29/bbl in the case of simple setups, as maintenance in the region starts. Indeed, a sustained positive crack on HSFO is contributing substantially to simple margins. Progressively increasing maintenance in Asia-Pacific, peaking in May, should broadly support margins for the next few months. However, there are still complications surrounding the teapot refiners in China, where drops in Russian fuel oil prices have apparently led to some CDU restarts and increased runs. Additionally, rumours that state-owned refiners had petitioned to increase export quotas, running counter to expectations, is muddying the waters and adding to the pervasive uncertainty. Still unconfirmed, but if additional quotas materialize, it will add bearish sentiment to clean products in Southeast Asia. While China may be lengthening this is being counteracted by a shortening South Korea where refineries are still feeling the pinch due to poor refinery margins and sluggish domestic and export demand. As such, the net effect here could turn out be small once the dust settles.  

Singapore: refinery margins ($/bbl)

Source: Kpler, based on Argus Media

Naphtha cracks rose by $1.24/bbl w/w to -$3.05/bbl as demand from new facilities in the wider region continues to support the prompt. While naphtha cracks are ostensibly strong, steam cracking margins continue to be poor. The outlook for cracks is a little mixed; while refinery maintenance will stem some of local supply, spot demand in its current form is unsustainable.    

Gasoline cracks increased by $0.31/bbl w/w to $8.11/bbl, the smallest positive move of major products this week as bearish sentiment descended on the market. Lower than expected demand from the likes of Indonesia, the biggest short in the region, is adding to an overhang of product from Northeast Asia. Less volume from South Korea will certainly help this to clear but will still take some time, setting up a weak outlook in the short term. Other weak markets for gasoline (see Europe section) certainly do not help.  

Gasoil cracks jumped by $2.94/bbl w/w to $15.53/bbl as the start of maintenance season Asia-Pacific supports the outlook. The prompt East/West continues to be on the weaker side which will keep Singapore markets free from additional Middle Eastern cargoes, even though March maintenance looks to be relatively low. Jet cracks rose by $2.04/bbl to $13.98/bbl, but the regrade widened as arbitrages from Northeast Asia out of the region are not especially workable and demand in wider Asia is seasonally tailing off.  

HSFO cracks rose by $2.79/bbl w/w crossing the threshold into positive territory at $1.96/bbl, as fuel oil markets continue to contend with tightening supply with Russian exports lower. Increased runs by Shandong refiners, in response to the higher margins in China and a drop in flat price, could decrease availability further. VLSFO cracks dropped by $0.84/bbl as Hi-5 fundamentals continue to diverge with VLSFO availability still high.  

Singapore product cracks ($/bbl)

Source: Argus Media pricing

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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