Viewpoint: European gasoline faces severe challenges
Oversupply and demand uncertainty will continue to weigh on the European gasoline market in 2021, with more structural reform likely as producers grapple with greater competition and a regulatory change that could shift transatlantic flows.
The immediate challenge facing the European gasoline industry is a significant supply overhang caused by the massive reduction in road fuel demand during the Covid-19 pandemic. Independently-held gasoline stocks in the Amsterdam-Rotterdam-Antwerp (ARA) trading hub are up by over 50pc on year-ago levels. Summer-grade gasoline left over from 2020 will weigh on the seasonal transition in April, when grades typically command a premium because of more stringent evaporability specifications. And floating storage in northwest Europe is rising again, also likely to be summer-specification finished-grade gasoline, ready for the market in the spring.
Demand is unlikely to recover quickly enough to draw down the bloated supplies. The roll-out of Covid-19 vaccines offers much needed relief, but it is likely to be several months "before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand," the IEA said in its December Oil Market Report. The organisation forecast a rebound in road fuels to 97-99pc of 2019 levels in 2021, but cautioned that a third wave of the virus could affect Europe and other parts of the world before vaccines have time to take effect.
Some gasoline production remains offline. European refinery run rates were around 70pc in December, but will head back up as demand rises in 2021. Eurobob oxy gasoline's margin to North Sea Dated averaged a $3/bl premium in 2020, its lowest on record. Notional refining margins turned negative again in December, and are likely to remain suppressed well into 2021. The pandemic has accelerated the rationalisation of Europe's refining sector, and without more of the same in 2021 the gasoline market will struggle to see healthy margins again.
Gasoline has long been oversupplied in Europe, and around a third of all production is earmarked for export. But competition for those export markets is increasing. Around 4mn b/d of new crude distillation capacity is due online in the next five years, largely in the Mideast Gulf and China, according to Argus consulting, with an additional 5.5mn b/d of upgrading. Road fuel demand is forecast to increase by just 1.5mn b/d in the same period. Global overcapacity will drive up competition in major export destinations like west Africa. The region was Europe's largest export destination this year, taking around 12.5mn t, or 36pc, of exports between January and November. If Nigeria is able to finally bring significant domestic refining capacity online as planned, the impact on Europe's supply balance will be severe.
European exporters need a recovery in US demand to be swift and prolonged. Gasoline demand in the world's largest market is down by double digits in December, although stock levels are closer to the historic average. European exports to the US have been down by as much as 40pc in 2020, but accounted for 60pc of Europe's reduction in exports between January and November.
EPA rule change to reshape European gasoline blending
A change in US fuel specifications that sets a new Rbob gasoline standard from 1 January could have far-reaching consequences. As well as setting a new summer RVP limit at 7.4psi, the US Environmental Protection Agency Fuels Regulatory Streamlining rule no longer restricts aromatics by removing its testing requirement.
Octane boosters with low aromatic qualities — such as alkylate and isomerate — will no longer command such a hefty premium. Reformate is the natural winner with a low RVP rating but high aromatic content, but so is naphtha. Relatively cheaper, naphtha can go directly into a gasoline blend or make reformate.
The EPA change could keep naphtha supplies tight into 2021, capping gasoline blending margins further and adding to European producers' problems. Competition in the Atlantic basin could increase for finished grades and blending components. New entrants, such as Russian A92 gasoline — which has aromatic content of 40pc — could find a market in the US.
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