Technical & Fundamental Oil Reports Specialists

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Gasoline hangover

Published Friday, July 15th, 2016

The world is in the midst of a gasoline glut. US inventories are at seasonally high levels and a surge in Chinese refining activity has triggered an unprecedented oversupply across the Asia-Pacific region. Though both these developments have been well documented, the conditions in Europe, which has seen healthy levels of gasoline consumption fail to prevent an uptick in stockpiles, have so far received relatively little attention. This is of concern as the situation in this part of the world is becoming increasingly precarious.

Unlike in the US, oil product storage tanks in Europe are inching perilously close to their maximum working capacity. As operational storage capacity falls to dangerously low levels, this has caused a backlog of tankers in recent weeks which have been unable unload their cargo as the struggle to find spare tankage intensified. In spite of this growing difficulty in storing refined oil products, figures released this week have shown that European refiners boosted their crude runs by 3.8% or 370,000 bpd in June compared with May. This sent gasoline stocks across the region 13.7% higher than in June 2015 and comes after an 8% y/y increase in May. Meanwhile, the IEA predicts that refinery runs will rise further in the coming months thereby adding to already excessive gasoline supplies. It forecasts that refinery throughputs will average 12.3 mbpd in the third quarter which is up 900,000 bpd on 2Q and 400,000 bpd from a year ago.

This projected increase in crude runs will only exacerbate the existing gasoline overhang and does not bode well for European gasoline margins. The European gasoline (EBOB) crack has performed poorly compared to last year ever since oil prices began to recover in earnest in March of this year. Strike action in France which took out 600,000 bpd of European refining capacity had offered some support to product margins in early June but this has since evaporated and they have fallen sharply over the last two weeks. European gasoline cracks have so far averaged $6.62/bbl in July, hitting a four-month low of $5.77/bbl in the process and are sharply down on the average $22.84/bbl seen during the same month last year. Undermined by ample supplies, European gasoline cracks are therefore behaving counter seasonally and are significantly below the average for this time of the year. Furthermore, additional downward pressure on margins is projected as we approach the latter half of the summer season where demand invariably begins to taper off.

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Posted by Stephen Brennock

Stephen Brennock joined PVM in 2013 after having worked as a project manager for a business development firm. He graduated with a degree in Business Management in 2007.