NWE road fuel margins buckle as refinery output rises

Increasing refinery utilisation in northwest Europe has increased road fuel output faster than the market can absorb, pushing down margins to crude.

Benchmark gasoline grade Eurobob oxy's margins to North Sea Dated crude have declined each day since 27 July, from over $4/bl to just 96¢/bl yesterday. Diesel margins retreated from $8/bl to $6.20/bl over the same period.

Refinery output has surged in recent weeks, chasing what had been rising margins — diesel margins touched three-month highs as recently as 22 July, and gasoline margins rose to $4/bl from under $2/bl between 20-27 July.

Multiple refiners brought back units that had been offline for economic reasons and others finished maintenance, even though margins remained weak compared with historical July levels, as demand approached and even surpassed year-ago levels in some regions.

The effect has been particularly pronounced in the gasoline market, where stock levels are on the rise. Independently-held gasoline inventory in the Amsterdam-Rotterdam-Antwerp (ARA) hub climbed by 4.9pc to 1.38mn t in the week to 29 July, a five-week high, and traders report rising amounts held in floating storage offshore northwest Europe, which until recently had shown signs of decline. This has helped to push down northwest European finished-grade cargo values relative to the Mediterranean region. After a consistent north-south premium in the first half of July, northern cargoes were at a $6.25/t discount to west Mediterranean gasoline yesterday, the widest since since April.

Other factors affecting gasoline margins include consistently high naphtha prices this month, which have weighed on gasoline blending economics and made typical gasoline export routes unworkable. Gasoline demand in the US, the primary export destination for excess European gasoline barrels, remains well below year-ago levels because of the Covid-19 pandemic.

European diesel markets have moved similarly in the past two weeks. Northwest European diesel cargo margins to Dated had shed all of this month's gains by yesterday's close. The three-month high of $8.49/bl represents only around half the average margin of more than $16/bl in the third quarter last year.

Rising refinery output is weighing on the margins, and additional pressure is coming from rising US diesel export loadings for European destinations. The weakness of US diesel demand caused by lockdown measures has led to record-high stocks and has improved the economics of exporting to Europe.

By Harry Riley-Gould and Benedict George