- The physical crack of FOB ARA ULSD barges versus Dated Brent hit a six-year high of $24.46/b mid-November 2018.
- In a longer-term outlook, 0.1% sulfur gasoil is being gradually replaced throughout Northwest Europe.
- Additional demand for gasoil from Nigeria may further tighten the Northwest European higher sulfur gasoil market.
- The expected annual peak in demand from WAF alongside the looming Nigerian Election in Q1 of 2019 could affect recovery in the gasoline price.
DIESEL: Rhine struggles to keep afloat.
- Barge crack hits 6-year high on tight ARA market, low Rhine
- Demand for road fuels decline in Europe but may tighten into IMO 2020
At the end of a dramatic fourth quarter, the ultra-low sulfur diesel market retraced from the highs observed amid a return of healthy supply and the typical end-of-year destocking. Earlier in the year, record-low Rhine water levels hampered barges from ARA to inland demand centers resulting in record-high barges freight rates.
Alternative means of transport were used to supply the inland markets, with typical shorts of the cargo market, such as Hamburg in Germany, emerging as critical demand centers from which the product was later shipped on railcars or pipelines. Adding to the pressure were the overall limited prompt availability in the Amsterdam-Rotterdam-Antwerp hub on the back of low arbitrage volumes from the US, which propelled the physical crack of FOB ARA ULSD barges versus Dated Brent to hit a six-year high of $24.46/b mid-November. While, the CIF Northwest European and Mediterranean cargoes differentials to the front-month ICE low sulfur gasoil futures jumped to three-year highs.
In December, Rhine water levels recovered, while large arbitrage volumes from the East of Suez and ample Primorsk ULSD exports eased the tightness in the cargo markets. The introduction of the sulfur cap of 0.5% for bunker fuel in 2020 is widely expected to lead to a tighter distillates complex. On the ICE low sulfur gasoil futures, the 2020 curve has remained in backwardation in a sign of an expected strength of the market.
The structurally-short Mediterranean ULSD market might see its fundamentals slightly altered in 2019, with the start-up of the new STAR refinery in Turkey. The refinery was due to commence product sales from its newly commissioned 214,000 b/d STAR refinery at Aliaga in December, but some traders doubted STAR would be exporting diesel before mid-2019, with the prevalent destination of the product — whether the domestic or international market — still uncertain.
GASOIL: Winter, a floor for heating fuels
- Europe’s desulfurization tightens supply
- Nigerian elections support gasoil demand in WAF
It is a mixed outlook for 2019 in the gasoil market. Low Rhine water levels and mild temperatures weighed on demand for 50 ppm and 0.1% gasoil in the last quarter of 2018, in turn exerting pressure on price differentials.
Despite the recovery in Rhine water levels in December, a surge in buying activity was yet to be experienced as mild temperatures meant lower demand from end-consumers. With colder weather anticipated in January gasoil demand may surge, although expectations of receding water levels add a bearish element to the barge market. In a longer-term outlook, 0.1% sulfur gasoil is being gradually replaced throughout Northwest Europe.
Germany completed its shift to 50 ppm gasoil and in November the French government announced plans to phase out the use of oil-fired domestic heating boilers within 10 years. Switzerland, one of the main inland outlets for 0.1% gasoil, also continued its progressive shift towards 50 ppm gasoil at a time where refineries are maximizing lower-sulfur gasoil and ULSD.
Delivered Crude Oil Coming into Dated Brent
After the recent S&P Global Platts consultation on the Dated Brent benchmark, Platts editors Robert Beaman and Paula Vanlaningham discuss with Joel Hanley the possibility of extra crude oil being delivered into the assessment. Meanwhile, politics in West Africa are also likely to affect fundamentals in the coming year.
Ahead of the Nigerian presidential election on February 16, the Nigerian National Petroleum Corporation has been supplying the local market with gasoil cargoes in order to keep retail prices low. The resulting higher demand from the region is likely to continue in the first quarter of 2019. With 0.1% gasoil in the Amsterdam-Rotterdam-Antwerp region being an important blending component for higher sulfur gasoil going to West Africa, additional demand for gasoil from Nigeria may further tighten the Northwest European higher sulfur gasoil market.
JET: Prices look east
- Market fundamentals soften on ample supply and limited demand
- Q1 Asian import volumes expected high, may weaken market further
Northwest European jet fuel market fundamentals softened over the course of Q4 as ample supply from East of Suez and an open arbitrage from the US Gulf Coast weighed on a market characterized by what is a seasonally low demand environment. During a period of the year where the frequency of some flight routes are reduced demand was lackluster adding to the overall pressure on market values.
Jet differentials to the ICE low sulfur gasoil futures took a dive through the quarter, due to the overall strength in the underlying ICE low sulfur gasoil futures — which reflects a 10 ppm ultra low sulfur diesel contract — in order to reflect the weaker fundamentals on jet relative to diesel.
The premium of the CIF NWE cargo to the front-month ICE low-sulfur gasoil futures — a measure of the relative strength of the market — fell from a high of $50.75/mt at the beginning of October to a low of $25.50/mt in November and remained below the $40/mt mark over the middle of December.
While most refineries maximized ULSD production over jet fuel on the back of strong ULSD physical cracks, the spread between the two narrowed towards the end of the quarter, with the jet FOB FARAG barge physical crack briefly moving above the ULSD FOB ARA barge crack. This could incentivize increased jet production in the next quarter if the trend continues. However, a persistent supply overhang in Asia and viable arbitrage economics could result in more barrels being pulled west of Suez and stocks building in NWE as a result, adding some bearish pressure to fundamentals in 2019.
GASOLINE: European demand capped
- West African annual demand crucial
- Refining margins expected to remain weak
The leading importers of European gasoline saw reduced flows through Q4 this year and optimism is subdued as the market moves into Q1 2019. Bearish sentiment defined the market — and the rest of the Light Ends complex by proxy — through the end of 2018, as North American and West African requirement waned.
That weakness is largely expected to linger in the short term, and any recovery in 2019 will be reliant on a significant improvement in that international demand. The front-month Eurobob crack dropped to as low as minus $1.90/b in Q4 of 2018, the lowest recorded since November 2011. Gasoline flows from Northwest Europe into the US and the East Coast of Canada averaged around 0.68 million mt/month in Q4, down from 1.56 million mt per month in Q3.
Further, imports from NWE into West Africa averaged around 1 million mt/month through the same period, according to data from S&P Global Platts trade flow software cFlow. Looking ahead, North America typically sees an influx of buying interest in March, as preparations for the busy summer driving season begins. This could be further buoyed by planned refinery outages in the US East Coast, as the gasoline-focused, fluid catalytic cracker in the Girard Point section of the largest refinery on the east coast will be closed during the first quarter of 2019 for maintenance, according to market sources.
Additionally, demand from WAF could behave as a reprieve to the gasoline market, with Q1 seeing an average of 1.8 million mt/month last year. The expected annual peak in demand from WAF for this period, alongside the looming Nigerian Election in Q1 of 2019 could be factors in a recovery in the gasoline price and helping to clear.
NAPHTHA: Heavy maintenance and weak gasoline
- Weak gasoline to maintain pressure on naphtha market
- Heavy maintenance at cracking units to dictate NWE balances
Persistent weakness in the European gasoline complex restricted naphtha blending demand in Q4. This happened even as delayed restarts at key regional steam crackers and reduced run-rates due to a spate of Rhine-related force majeures at downstream units drove naphtha cracks to their lowest level in nearly four years.
The front-month CIF NWE naphtha crack swap moved down from minus $3.20/b at the beginning of October, to minus $11.25/b on November 11, its lowest level since November 10, 2014. Market bears are likely to continue taking their cues from the comparative performance of the European naphtha crack relative to the performance of the EBOB gasoline crack in Q1 2019, as the latter is expected to remain capped by sluggish demand.
Meanwhile, propane’s discount to naphtha may shrink under generally colder weather conditions, meaning the true swing barrel expected to displace naphtha demand in the following quarter is butane. As a result of weak gasoline, weak butane has already made that market more attractive for petrochemical players, and with the likely recovery of Rhine water levels in Q1, petrochemical end-users in Europe may well overcome the logistical complications of bringing butane to inland crackers via barge.
“There is always hope in the quarter 1 as the market tends to rally in the new year, I myself get sucked into that optimism, but the truth is I’m not seeing any demand between now and then,” said a source. Adding further to the demand side constraints is a heavier than usual cracker maintenance season beginning in Spring of next year. Steam cracking facilities owned by Versalis, Dow Chemical, Shell and BASF will be undergoing scheduled turnarounds, with sources pointing to the prospect of a further lengthening of the naphtha market in early 2019.
LPG: Shift in Wider Light Ends Fundamentals
- Propane grapples with weak naphtha market
- Petchems benefit from falling butane complex
Unable to rely on seasonal trends, both propane and butane are likely to spend the first quarter of 2019 looking for shifts in direction to the gasoline and naphtha markets. Weak gasoline demand has had a knock-on effect through the tail end of Q4, and whether demand from the US shifts into a higher gear is likely to set the tone across the lighter end of the barrel.
In the propane market, the compression of the propane-naphtha spread continued in the fourth quarter, hitting a nearly one-year low of $25.75/mt on December 6. That narrowing has largely been driven by naphtha, under pressure from weak gasoline markets and more responsive to the wild fluctuations of the crude complex than propane. So far, the market has not had a boost from seasonal winter demand, lessening the impact of a storm of logistical headaches for the inland markets, including low water levels and strikes, with any reprieve feared to be only temporary.
In butane, a burst of blending demand proved to be short-lived, sending most of the complex on a steady downward trajectory for Q4, back to levels seen in summer. That left butane the best buy on the feedstock slate for petchems, and without another surge of late-season blending demand, the complex will be weighing whether it has still further to fall.
RUSSIAN DOMESTIC: Authorities Control Gasoline Prices
- Gasoline in focus in the Russian domestic market
- Pending excise and VAT rises to add to volatility from January
High diesel prices provoked the ire of the independent retail sector early in the year but it was gasoline that remained in the focus of the authorities and the Russian domestic market at large throughout 2018. Gasoline prices remained subdued in the run-up and after the March presidential elections but in May spot prices on the exchange floor soared, tracking significantly higher export netbacks and rising exports.
Eventually, the government was forced to retroactively cut the excise duties for both gasoline and diesel as of June 1, compensated farmers for the high diesel prices and threatened to raise drastically the export duties if the situation got out of control. But the calm of the summer months was followed by another price surge as autumn refinery maintenance got underway. This time the government summoned oil companies and signed an agreement with them to keep tank farm and retail prices steady until the end of March 2019 and to increase sales on the exchange floor.
However, in return the government asked the St. Petersburg exchange to tighten trading rules and clamp down on so-called “speculative deals” or short selling. But Rosneft, the biggest seller of oil products on the exchange floor, with 12 domestic refineries, halted its sales as, according to media reports, it was unwilling to sell volumes which would subsequently be resold.
The dearth of supply once again pushed spot prices up, although the appearance of Belarus volumes and the eventual return of Rosneft, after it agreed “a number of measures” with the regulators aimed at improving exchange trading relaxed prices. Amid the calamity surrounding gasoline, the high winter diesel prices went unnoticed. But with the pending excise and VAT rises from January and ongoing shortages of winter diesel supply, the start of 2019 could see a new round of interesting events on the Russian spot market.
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Source: S&PGlobal Platts