Exports give European gasoline an unseasonal boost

Firm US gasoline demand following a spate of refinery problems has drawn in European shipments, easing regional oversupply and boosting margins.

Freezing temperatures and heavy snow forced a series of pre-emptive and unplanned winter shutdowns at refineries and petrochemical plants along the US Gulf coast, tightening product supply and bolstering interest in imports.

Many turned to Europe to help cover the shortfall. This led to an unseasonal surge in European gasoline margins, which climbed to a premium of $15.70/bl to North Sea Dated crude on 16 January, from a discount a month earlier (see graph). Premiums have averaged around $13/bl this month, their highest January average since 2016, when they were $14.30/bl.

The firmer transatlantic demand has coincided with a rapid fall in clean tanker freight rates, bolstering the economics of shipping product to the US. Clean Medium Range tanker rates on the UK-US Atlantic coast route had dipped by over 44pc on 11 January from the $57.43/t recorded on 9 December, Argus data show (see graph). The sharp drop came on lower interest from diesel buyers that had previously rushed to secure tanker bookings from the end of November to the start of December, pushing freight rates to two-year highs.

The increased US demand and lower shipping costs opened the transatlantic arbitrage, which had been unworkable in November. Second-month Rbob gasoline futures in the US rose to a $1.24/bl premium to front-month Eurobob gasoline swaps in December, up from a $3.55/bl discount in November, indicating the viability of exporting shipments from Europe to the US (see graph). US imports of gasoline averaged nearly 600,000 b/d in December, up from around 546,000 b/d in November, according to EIA data.

Steady demand from other destinations including west Africa and Brazil has provided additional support to gasoline margins in Europe. Market participants also noted that economics for exports to Asia-Pacific have become profitable, possibly linked to rising Chinese demand following the government's reversal of its zero-Covid policies, although loadings on that route are yet to be seen.

Bleaker outlook

But the unseasonably strong margins may belie weaker fundamentals in Europe. European refiners have been operating at high utilisation rates to help cover an anticipated shortfall in Russian diesel supply once EU sanctions take effect in February. The high throughputs are having a knock-on effect of bolstering gasoline supply. And some European refiners have turned to lighter sweeter crudes following the EU ban on Russian seaborne crude imports in December, which could boost their light products yields.

At the same time, gasoline consumption is seasonally at its lowest in the winter, and this could be compounded this year by recessionary headwinds.

But the market could face some supply interruption in the coming weeks. The EU's impending ban on Russian-origin oil products imports will inadvertently affect gasoline through a reduction in naphtha arrivals — a key blendstock especially for winter-specification gasoline.

And French refinery workers went on strike again on 19 January over a retirement age dispute with the government. Widespread industrial action in France in October shut down five of the country's six refineries, causing a sharp tightening in product supply in northwest Europe, which helped push gasoline margins to $28/bl premiums to North Sea Dated. Strikes are also planned for 26 January and 6 February. That will be followed by the beginning of the spring refinery maintenance season in Europe, which will bring fresh shutdowns.

By Jonah Sweeney and Robert Harvey

UK to USAC freight rate

NWE gasoline margins

Gasoline: Rbob vs Eurobob