Why does Europe keep leaving gasoline and naphtha on the shelf?

Benedict: Hello, and welcome to this "Driving Discussions" podcast made by the Argus European Products Team. And we're going to talk about the gasoline market this summer, the gasoline and naphtha markets, really, because of course, naphtha is the main ingredient in gasoline. I'm Benedict George, editor of European Products at Argus, and I've got with me our gasoline reporter, Atishya Nayak.

Atishya: Hi, Benedict.

Benedict: And our naphtha reporter, Jide Tijani.

Jide: Hello, Benedict.

Benedict: We're going to talk about how the summer has not been the traditionally strong summer that the market typically expects in gasoline. So, for the background, for those of you listening who are not as familiar with these markets, gasoline demand is usually strongest in the summer because gasoline is the typical fuel for passenger cars, and people drive their passenger cars much more in the summer than they do at other times of the year because they go on holiday, basically. And that means gasoline demands usually strongest in the summer. But this year, let's kick off with you, Atishya, that hasn't really happened this year, has it? That traditional strength has not really appeared in prices.

Atishya: So definitely not. I think from what we can see this year, gasoline demand was expected to be low ahead of the summer season from the market. And most of our fundamental indicators point to the same. It is usually typical ahead of the driving season, which officially begins end of May. It is pretty typical from late March and early April to see a surge in gasoline blending for summer grids.

But this year, we didn't really see that. Quite the opposite happened. In the winter season in January and February, we actually heard of really firm blending for gasoline in Europe. And we did talk about this in an earlier podcast where there was so much blending in the region that we saw record-high stocks at independent tanks in Amsterdam, Rotterdam, and the Antwerp hub. But once this blending interest died down and summer actually began to approach, and the shift to summer-grade gasoline happened, blending actually slowed down for multiple reasons.

The first being that there was enough stock in the market at this time for there to be no need to blend further. So exports have also been a lot slower, especially to the U.S. and West Africa. And you can see this indicated by the margins as well, because as we shift to summer-grade gasoline in late March, you also see gasoline refining margins against brand start to pick up and show some strength. But none of these typical things that we've seen almost every year happened.

Now, 2024 was also a relatively weak year in terms of margins, in terms of blending interest compared to historical levels, from what we hear. But this year, we didn't see any expectations from the market for a strong summer. And this was mostly because of restricted outlets for gasoline exports.

So Europe's traditional markets, as we've touched on multiple times. So, Europe's traditional markets have just shrunk to the point where export interest has dropped to historical lows in the last few months. And you can see this in margins as well. They have sort of just been range-bound in the about $10 to $14 per ton levels compared to five-year averages being above the $18 mark, especially in the summer.

Benedict: That makes complete sense. Thanks, Atishya. For the benefit, again, of those not so plugged into these markets every day, Europe is a net exporter of gasoline, right? So, whereas Europe needs to import a lot of diesel and a lot of jet fuel and so on to meet its domestic demand, Europe produces far more gasoline than it consumes domestically. So, it always has a lot available for export. And recently we've seen the markets where Europe usually exports that gasoline shrinking, especially in Nigeria, for example, where the Dangote refinery has started up.

Again, this is a subject we've talked about a lot for the listeners who've listened to other podcasts we've made, this is something we've talked about a lot. The Dangote Refinery coming online over the last 18 months or so, and supplying a lot of that gasoline demand in West Africa, which was traditionally supplied with European gasoline. So that makes complete sense. Thank you.

Now, Jide, naphtha is the main ingredient in gasoline one way or another through various different routes and different processes. So, has this weak gasoline market in the summer, has this pushed down naphtha prices and refining margins as well?

Jide: Yeah, so on the naphtha side, the weakness in the gasoline market definitely weighed on refining margins for naphtha. So normally, stronger gasoline demand in the summer boosts blending activity and provides a flow for the naphtha prices. But as Atishya said, we know that gasoline exports was subdued, particularly to the U.S. and West Africa.

We saw the gas map spread, you know, compared to previous summers, it didn't quite reach the same heights, especially in 2023, where we saw, you know, astronomical spreads. In regards to the naphtha cracks, I believe in June, it reached day 14 month low, so not great refining margins for naphtha. And normally, we see petrochemical demand, which is the other outlet of demand for naphtha give some support. But at the same time, we didn't see much, you know, much demand in that aspect either.

It wasn't a great time, you know, over the summer for naphtha. So there was a lot of oversupply in Europe, general weak demand. And then at the same time, we did see cheaper, you know, propane. So, going back to when I mentioned about the other demand outlook for naphtha being petrochemicals, we saw really cheap propane displace naphtha. So that was leaving surplus barrels of naphtha in Europe, that was adding pressure, further pressure to the margins. But there was some reprieve. You could probably speak more on this because you was well in touch on this topic, the Azeri Crude contamination issue, which did tighten the naphtha the market a little bit. Yeah, I'll let you hop in.

Benedict: Yeah, it was really interesting, this Azeri crude issue. The BP confirmed quite publicly that this happened. BP's heavily involved in the production and export of this Azeri crude via Turkey. And basically, the issue that these refineries in the Mediterranean were finding was that the crude they were receiving contained more chloride compounds than it was supposed to contain.

The problem with the chloride compounds is they react during the refining process to form acids, and the acids corrode refinery machinery. So refiners don't want chlorides in the crude. And then there's a sort of a further problem down the line where the chloride compounds, which are relatively light, tend to collect in the lightest products that the refinery is making. So you get naphtha, for example, coming out of the refinery with a lot of chlorides in it. And so that's a problem when you're trying to sell that naphtha to a petrochemical company or something, because they are also worried that these chlorides are going to form acids in the machinery and corrode the machinery. So that problem trickles down through the supply chain. And as you say, it makes complete sense. These naphtha buyers were worried that the naphtha they were going to get would be contaminated in that way. So, yeah, lifted naphtha prices temporarily. Thanks, Jide.

Atishya, we heard a little bit about the spread between gasoline and naphtha there. We also look at the spreads between gasoline and some of the really high-quality, high-octane components that people blend with naphtha to make gasoline. In the recent years, we've heard a bit about an octane crunch, which people mean a shortage of these high-quality, high-octane components.

So in recent years, I believe I'm right in saying we've seen some enormous premiums for those high-octane components against the price of the finished gasoline itself. But this year, with a weak gasoline market this summer, am I right in saying there was no octane crunch, there was no concern about a shortage of these high-octane components? Everybody had quite as much as they wanted.

Atishya: Right, absolutely. So just to put in a little bit more context, I think even the idea of an octane crunch, where if you had to be specific, you're largely looking at blending components such as your lighter and heavier RON reformate and alkylate, and mix xylene on occasion and toluene as well. But with a lot more reformate and alkylate goes into European gasoline. So we just focus on those numbers to start with.

But when we talk about this idea of an octane crunch, I think it's fairly recent. It's a post-COVID. So we saw it in 2021 and 2022, a little bit in 2023. But by the time summer turned around in 2023, the gasoline was well supplied. I think there was some support at that time because of refinery outages in Europe. But in those times it made sense. Margins for everything were exceptionally volatile, also because of the Russia-Ukraine war being at its height, which is not a typical trend, of course. But even when we look at a ratio between a wide gas map, gasoline-naphtha spread, what was considered wide in 2022 and 2023, which was approximately $250 to $300 on spreads is less than half at this point. So throughout this summer, we've sort of averaged at $130 to $140 in the last few months. August has been slightly wider at about $140 in the last few weeks. So August has been slightly stronger in terms of margins as well as gasoline-naphtha spreads.

But this hasn't sort of trickled down into demand for blending components either. So what has mainly happened is because the market has sort of been able to judge in advance of the driving season actually arriving that there is nowhere to send European gasoline, and domestic demand only accounts for so much of what is actually produced.

There has been no incentive to blend it, and this has also trickled down into weaker flat prices, a narrower gasoline-naphtha spread, and hence components such as reformate have averaged at less than $50 per ton premiums for the lower RON and about $60 for the higher RON. When we compare it to previous years, even when we look at 2024, where geopolitically, things were a little bit calmer, reformate prices were at $140 to $180 premiums during the summer season because there was actually a need for blending more gasoline. But at this time, refiners have no incentive to blend more.

There's also been a lot more stocks for these components because refiners produced enough earlier in the year. So I think with the octane crunch, what is important is that with the shrinking export market that we've been touching on throughout this year, we're probably not going to see any more octane crunches going further on until something dramatically changes within the refining landscape in Europe. So, going forward, there's a good chance that we will, even during summer's "peak demand" season, we will see enough components that refiners will continue to face lower margins than what we've seen historically and have plentiful components available, even have excess for that matter.

Benedict: Thank you. This is bringing to the fore, I think, that it's important for us to emphasize what Jide was saying before, how there are these other things in the background making naphtha cheaper at the same time it's not all coming from gasoline, it's also coming from the fact that petrochemical producers in Europe have been shutting down capacity and because even further in the background, perhaps Europe has been running lighter and lighter crude in its refineries since even before COVID actually, because of the influx of supply of shale crude from the U.S. Gulf coast area. So European crude slates have got much larger, and there's been more and more supply of naphtha around and in the face of shrinking demand for naphtha. So naphtha has been getting cheaper in the background. And if you have naphtha getting cheaper, it will tend to widen out these spreads between gasoline, naphtha, and then above gasoline, these really high-quality components, because while you have more and more naphtha around, you don't have more capacity to upgrade that naphtha into the high octane high-quality components.

So maybe that was part of why we saw these really high spreads for the high-quality components a few years ago. But now more recently, the gasoline itself has got cheaper independently of the naphtha because of the decline of demand for gasoline exports out of Europe into West Africa, for example. So you now have the whole thing following naphtha down, and gasoline prices and reformate and alkylate prices following naphtha down, and these spreads narrowing again.

So that's why it's so interesting to connect these two markets, I suppose. But I wanted to ask you, Atishya, picking up on something that you've said there, because last summer, 2024, was much weaker for gasoline than people had been expecting. This year, are you saying that people had much weaker expectations going into this year? So a lot of people, you know, in Q1 2025, they were not actually expecting the strong gasoline summer that you would've had traditionally.

Atishya: Right. So I guess last year there was expectation for gasoline to be supported from mainly the U.S. Atlantic Coast export interest. But when that didn't happen, we saw the support fall into the summer driving season. Because the market appears to have already seen the demand landscape for European gasoline, from Q1 itself, it appeared that nobody had very high expectations. When we speak to traders, there was very much an idea of, let's see what happens. And of course, there were U.S. tariffs that weighed on global export markets entirely.

So the summer season itself started extremely uncertain and more on the bearish and the weak side. And then demand, of course, also did not keep up to historical standards. Maybe now is a good time to say, maybe this is what gasoline summers would look like going forward. And the driving season demand, where we'd average more than a million barrels a day, even 1.5 million barrels a day of exports, are probably behind us.

Benedict: Thanks, Atishya. So Jide, given that unusually weak gasoline summer that we've just had, you are looking ahead, I know, at the winter already for naphtha, especially. How does the coming winter look to you for naphtha and gasoline?

Jide: So, looking ahead to winter, I'd say the picture is mixed. So on one hand, the seasonal spec shift means more butane will enter the gasoline pool, so reducing the call on naphtha for blending. So due to the RVP or Reid vapor pressure specification, which is by the way a common measure of evaporability or volatility for oil products, less naphtha demand will be around, you know, for gasoline blending.

In the wintertime, we generally do see more, well, weaker demand for driving in the winter months. So that would also have a further implication on less naphtha demand for blending. At the same time, in the winter, LPG prices tend to rise due to heating demand. So, petrochemical crackers may switch back to using more naphtha as a feedstock, so that could support prices.

There is a delicate, you know, push and pull. But generally in the winter, we see petrochemical producers tend to destock their ethylene and their propylene. So they're not really pulling more naphtha to crack for more. So it is unlikely we'll see a really big rally in naphtha prices in that time.

So my long answer short is a more of a balancing act between reduced gasoline blending pool, but potentially more petrochemical intake depending on the propane naphtha economics, but keeping in mind that, you know, petrochemical producers do tend to destock in the winter.

Atishya: It's interesting talking about butane and gasoline during the winter months, of course, to manage RVP levels. So you know how prices compared to previous summers this year is just like really low on gasoline, it's just been between $670 to $700. Flat price usually is a little bit higher, but obviously, that has this weight on, okay, naphtha is weak, and that's why it's pricing where it is, but gasoline is a lot weaker than it normally is. And when you add more butane in the winter and you take out these higher octane components, because butane is a lot cheaper than a lot of these higher octane, but as well as higher RVP components, gasoline price is going to get even cheaper and naphtha would I guess even if it balances out, it'll stay where it is or probably get slightly pushed higher because of petrochemical demand. So basically, it means your gas map spread would be even narrower than it already is. You see what I mean?

Benedict: Yeah, [crosstalk 00:19:11]

Atishya: So like even, like, blending margins for winters are, like, probably going to be much worse.

Benedict: Yeah, that does make sense. And I think it's really important for us to point out that if the margins look too bad to justify blending, people will still be blending and producing a lot of gasoline because people have contracts they have to meet. So I guess another way of putting it would be prices might make it look as if there is a more economical thing to do instead of making gasoline and supplying it to your customer.

But actually, because of the physical constraints of the world and the logistics that are available to you and the personnel that are available and so on and so forth, not every company can capture all of the profit opportunities that are there in theory. So even when margins don't look good enough, a lot of gasoline production, for example, will still be happening as a bedrock all the time because everybody's machinery is set up to do this, and the contracts are in place and so on and so forth.

Atishya: Can I throw in Lindsey's example, though? So, we've heard from the market that Lindsey's exports, one-third of them were gasoline. So refineries that were probably as export-facing as Lindsey was, are more likely to close down in maybe the more medium term future, would, I don't know, face the consequences of permanently declining economic feasibility on it because maybe...

Benedict: Absolutely. Yeah.

Atishya: ...maybe not directly the cracking margins itself that define all of it, right, because obviously we've touched on this so many times that post-COVID refining margins are just going to average higher because costs of running a refinery are so much more expensive. But when you add narrower blending competent premiums to gasoline, along with a narrowing gasoline-naphtha spread and higher cracking margins altogether without the same ratio of profitability, the more medium to longer-term result would be to lower gasoline yields in Europe.

Benedict: Exactly. So in practice, what that means is refineries closing down because they're not profitable enough, like Lindsey. People will continue to do something unprofitable in the short term, hoping it becomes profitable again. And if it doesn't, then they have to shut down. Well, I think that's really interesting. And that's all we've got time for, I'm afraid, on this podcast, but I'm sure we'll be making another one soon, touching on some of the same points.

And as we've mentioned, there are podcasts available, you know, that we've recorded over the recent months about the Dangote Refinery, for example, about gasoline margins. Of gasoline economics earlier in the year. Lots of podcasts there for you to dig into. And if you have any questions or you want to know more about these markets, please don't hesitate to get in touch with London Products at argusmedia.com. We will be very happy to engage with you and talk to you about some of these same subjects, and we'd be very glad to hear from you. So thank you very much, Atishya and Jide.

Jide: Thank you. Thanks for having us.

Atishya: Thanks Benedict.

Benedict: And we hope to be speaking to you again soon on a similar subject. Thank you very much for listening.