Gasoline's peak spring and summer demand season started promisingly enough in Europe in April only for values to fall away in May. Cracks have since risen again to the seasonal summer peak, but it is symptomatic of the market that the improvement has been driven by temporary refinery run cuts and shutdowns rather than long-term improvement in the supply/demand imbalance. Only a reduction in European capacity seems likely to provide any permanent solution to gasoline's woes.
April cracks in Europe were on average $1.50/bl higher compared with the same period last year as low gasoline stocks in the US and indications of higher demand there boosted spot bookings from Europe. But cracks fell away again in May as shipments fell, US stocks rose and seasonal demand failed to rise significantly in Europe. Run cuts for economic reasons in Europe, compounded by planned and unplanned shutdowns, reduced supplies, nudging values up to more normal summer levels. But subsequent increases in runs pushed down values again as arbitrage bookings to the US remained thin in late July and European demand looked lacklustre.
The arbitrage from Europe to west Africa was also busier than usual throughout April to June, with the number of spot bookings almost 50pc higher during those three months than during the same period last year. Volumes were up by two thirds to more than 200,000 b/d. The trade flow has been helped partly by favourable arbitrage economics but also by an increase in Nigerian import quotas as the country's supplies were pulled down further by problems at its refineries, which only operate at 30pc capacity at best. The situation was exacerbated by distribution problems and allegations of hoarding by retailers within the country, on top of the usual delays to access the port of Lagos and delays from the port onwards. Nigeria increased its import quotas by 70,000 b/d for the first quarter of 2014 and by 102,000 b/d for the second quarter.
But doubts remain as to how long the increase in west African trade will remain – figures were sharply down in July – and there is also the prospect of an increase in exports from the US Gulf coast. Gasoline output there has risen sharply over the past couple of years as refiners take advantage of growing volumes of cheaper and naphtha-rich shale oils. US refiners have, in turn, increased exports to Latin America but also to west Africa last summer. US Gulf Coast exports had taken 20pc of the 1mn t/month west African market by July last year. Predictions grew that US exporters would continue to take part of the west African market — which had previously belonged almost exclusively to European refiners — and that the US share of the market could grow to as much as 50pc. But volumes fell sharply by winter — to below levels a year earlier — and have remained low since, with only one small cargo a month going to Nigeria and one to Togo, as arbitrage economics worked against them and the volatility in RINs prices in the US subsided. More favourable economics could lead to another rise in US exports to Africa, taking more trade from beleaguered refiners in Europe.
In Europe, more refinery shutdowns and disposals seemed inevitable six months ago. The 130,000 b/d Milford Haven in Wales duly shut – although it was eventually reprieved when Swiss investor Klesch agreed to buy it. And Italy's Eni is taking a more aggressive approach to reducing its refining capacity, as weak refining margins and lower-than-expected demand have forced the company to revise its 2014-17 strategy. Eni, which has already shrunk its refining capacity by 30pc since last year, has now increased its total capacity reduction target to more than 50pc from 35pc projected in February. The 105,000 b/d Gela plant in Sicily was affected by industrial action after a promise of new investment was withdrawn, according to unions, following run cuts there throughout the winter and spring. And in France, Total's moratorium on closure of domestic refineries runs out next year.
A slew of run cuts across Europe in May and June – on top of planned and unplanned shutdowns – reduced supplies, pushing up refinery cracks. But by mid-July supplies were rising again, sharply pushing down cracks by $4/bl in a few days. With higher cracks seemingly unsustainable, another slew of plant closures and sales as well as run cuts seems inevitable in Europe.
And demand in Europe continues to fall, though less steeply than last year as Europe emerges from recession. IEA statistics show gasoline demand fell by 1.7pc in May from a year earlier as gains in Germany and the UK continued to be outweighed by falls elsewhere, particularly in France and southern Europe. But that decline is a sharp improvement from falls of as much as 9pc across the region in early 2013. In any case, economic recovery will continue to be counterbalanced, at least in part, by efficiency gains and switching to alternative fuels, particularly in northern Europe, so the long-term decline in gasoline demand is likely to continue.
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