OUTLOOK ’16: Gasoline margins key to keeping refinery output up

Cuckoo James

29-Dec-2015

LONDON (ICIS)–Crude oil refineries in the Middle East, China and Europe are expected to contribute heavily to keeping global refining utilisation rates at its highest since 2007 for the foreseeable future, provided gasoline margins remain high.

“Throughput for 4Q15 and 1Q16 are estimated at 79.7m b/d and 79.6m b/d, respectively, with yearly growth of 1.4 mb/d for each quarter,” the International Energy Agency said in its December Oil Market Report.

European refiners are keen to continue this year’s high run rates provided benchmark Brent crude oil futures remain at low levels and gasoline demand stays as high as it has for most of 2015.

Gasoline is set to reign as the chief road transport fuel at least until 2040, although diesel share in the pool will increase up to 45% by that time, according to OPEC’s World Oil Outlook 2015.

US drivers bought 3% more gasoline from January to September 2015 than they did the same time last year, riding high on the confidence coming from high employment rates.

The highly price-elastic US market also took advantage of the value slump in oil to pocket more fuel for less dollars. Next year too, a lot could depend on how crude oil performs next year.

At its 4 December meeting this year, OPEC indicated it was planning to continue the policy of defending its market share in a low price environment. Crude oil prices have plunged to 2004 levels since that crucial meeting, and many predict it will stay low on the back of rising supplies.

The US Energy Information Administration (EIA) estimates OPEC crude oil production averaged 30.1m bbl/d in 2014, and will increase by 900,000 bbl/d in 2015, led by production growth in Iraq.

The EIA forecasts OPEC crude oil production will rise by 300,000 bbl/d in 2016, with Iran forecast to increase production once international sanctions targeting its oil sector are suspended.

Crucially, the EIA predicts Brent crude oil futures will average $53/b in 2015 and $56/b in 2016.

The US gasoline growth story could thus be here to stay if crude futures keep low, but at a much reduced 0.1% hike in 2016, as per the EIA’s Short-term Energy Outlook published in December 2015.

The culprit in the slower growth next year is improving vehicle fuel economy over the past eight years which continues to keep gasoline consumption below its previous peak.

On 30 November, the US Environmental Protection Agency (EPA) finalised a rule cementing Renewable Fuel Standard (RFS) volumes through to 2016. Following this, ethanol share of the total gasoline pool is expected to average 9.9% in 2015 and 10.0% in 2016, as per the EIA.

Asia is another export destination for European gasoline and blending components. “The motorisation of the population in the developing countries is one of the principal factors of the future growth in demand for oil,” Lukoil said in its Global Trends in Oil and Gas Markets to 2025.

“In the forecast period, the most noticeable increase in car ownership will take place in China leading to 220m car fleet increase for the period of 2010-2025. Significant growth in car ownership will also be registered in India and other developing Asian countries,” the oil giant said.

This year, European gasoline markets were buoyed by intermittent demand from China as well as Nigeria, another major emerging market buyer.

Successive attempts by the Muhammadu Buhari government to hike Nigerian refinery utilisation rates from its long term 10% has met with limited success, and the country continues to rely on imports to meet its fuel requirements. This market is expected to be strong buyer of European gasoline for the near term.

Although European gasoline trading firms are keen to capture new business in emerging markets, some maintain the current slowdown in the Chinese economy is an important inflection point for commodity markets.

“Combined with the uncertain prospects for global GDP growth in 2016, it means that markets, whether for oil or for metals and minerals, will be characterised by surplus supplies and relatively depressed prices for some time to come – in some markets, for another several years,” Jeremy Weir, CEO of trading firm Trafigura said in the company’s annual report.

By Cuckoo James

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