Viewpoint: NWE gasoline margins under pressure in 2019

European gasoline crack spreads will remain narrow in the first half of 2019, as high stocks in the US continue to weigh on import demand.

US gasoline inventory levels in the first half of 2019 are likely to remain above the five-year average, capping the price of the product in the country relative to crude, and pressuring arbitrage economics to north America, a key outlet for European gasoline.

Stocks have been on average nearly 10mn bl higher year on year in the second half of 2018, and have pressured cracks throughout the period. Poor arbitrage economics to the US, combined with logistic pressures from low water levels on the Rhine river, have contributed to Eurobob oxy gasoline refining margins dipping into negative territory for the first time in more than seven years in October 2018.

Abundant US supplies also mean European prices will not get their customary seasonal boost from US restocking demand ahead of the summer driving season in the second quarter. Output in the US will remain robust in the first half of 2019, as refiners continue to run their facilities high to chase stronger distillate margins, producing surplus gasoline in the process. Weekly US Gulf Coast net refinery production averaged around 1.1mn b/d in November.

West African inflows ahead of Nigerian presidential elections in February will offer limited support, as they will likely fall precipitously after January. Nigerian gasoline inventories have reached 2.6bn litres as of 10 December, equivalent to around 52 days' worth of consumption, and above the targeted supplies of 50 days of consumption ahead of the presidential election. But stocks will likely draw after the election, with the Nigerian government typically maintaining supplies equivalent to around two-week's worth of consumption. European exports to Nigeria will remain subdued for most of the first half of 2019.

Domestic refinery output will have a negligible impact on import dynamics. NNPC's refinery utilisation from January to August 2018 averaged 12pc, down from 18pc in 2017, and is unlikely to rise significantly in 2019.

East of Suez markets will not offer European gasoline much support either, as refinery capacity additions will weigh on regional premiums. In the Asia-Pacific region, new projects scheduled to come online by 2019 include state-owned Petronas' 300,000 b/d Rapid refinery in Malaysia and the China-backed 175,000 b/d Hengyi refinery in Brunei. In China, the Hengli Petrochemical and Rongshen's Zheijang Petroleum and Chemical refineries, each of which will have 400,000 b/d capacity, are also due to start full operations next year.

European deliveries to Asia-Pacific have at any rate been slowing in recent months as a result of poorer arbitrage economics and the introduction of import taxes on reformate and mixed aromatics in China. A well supplied Asia-Pacific market will pressure European prices downwards by squeezing Europe's share of imports into the Mideast Gulf, where refinery restarts are also set to weaken demand. But unplanned outages could provide European gasoline pockets of strength, as it was the case in August-October 2018.

State-owned refiners Kuwait KPC and Abu Dhabi's Adnoc planned to restart gasoline-production units in the fourth quarter of 2018, which will limit import demand to the region in early 2019. Adnoc is likely to resume operations at a 127,000 b/d RFCC at its 417,000 b/d Ruwais 2 refinery, whilst KPC is expected to restart a reformer in December 2018. The units have been respectively offline since January and May 2018.

It is unclear what role high-ethanol gasoline blends will play in 2019 in curbing gasoline demand growth. In the US, the Trump administration recently moved to allow the sale of E15 gasoline in the summer months. But the new policy is likely to face political opposition in Congress, which could slow the roll-out. And any regulatory changes are unlikely to significantly impact consumer demand in the short-term.

Similarly, the roll-out of E10 in the Netherlands is set to be delayed from October 2019 to January 2020. And in China uncertainty regarding ethanol supplies could impede the planned nationwide introduction of E10 by 2020.

But greater take-up of higher ethanol blends in any of these countries could act as a drag on global gasoline demand growth, further upsetting the supply-demand balance in Europe.