European gasoline margins set April record

Constrained supply and rising seasonal demand have helped push northwest European gasoline cracks to their highest level for any April on record, setting the scene for another bumper summer driving season for the region's producers.

Benchmark Eurobob oxy gasoline's notional premium to the North Sea Dated crude benchmark hit $24.76/bl this week, the widest since 2015. Premiums have averaged over $20/bl so far this month, more than double the April average last year and the widest for any April on record.

Seasonal factors underpin some of the margin strength. Gasoline cracks have risen rapidly since the transition to premium summer grades at the end of March, as more expensive blend components such as reformate and alkylate typically push prices higher. Moreover, demand picks up around this time of year, with April marking the start of the peak summer driving season. But this is not the full picture, as margins rarely reach premiums in the $20s/bl outside the peak demand period of June-August.

A key reason for the unusually high gasoline cracks is surging refinery operating costs, the result of record natural gas prices that have been sustained in large part by the war in Ukraine. Supply constraints are another factor, although these are a hangover from the pandemic rather than war-related. Unlike middle distillates and heavy oil products, the European gasoline market is broadly shielded from any loss of Russian supply resulting from sanctions and self-imposed embargoes, as the region is physically long gasoline, imports very little from Russia anyway and already restricts imports via EU tariffs. This explains why diesel premiums in Europe are twice as high as gasoline at the moment, with French diesel cargo prices over $50/bl above North Sea Dated this week.

While gasoline supply in Europe has been relatively untouched by Russian shortfalls, it remains broadly constrained by Covid-induced cuts to regional refining capacity, which have not been reversed even though demand picked up to pre-pandemic levels last year. Market participants have reported refinery units running at full capacity where possible, but with Europe in the middle of spring maintenance season, regional supply is still insufficient. EU-15 refinery output fell by 4pc on the month in March to its lowest level since October 2021 at 9.72mn b/d, according to the latest Euroilstock data.

The return of Europe's largest refinery to full capacity should help alleviate the shortfall. Shell restarted a crude unit at the 420,000 b/d Pernis refinery in Rotterdam this week after maintenance work.

Yet to peak

Gasoline cracks could go higher still. Around 600,000 b/d of European refinery capacity, or roughly 6pc, has been permanently lost to the pandemic, according to Argus estimates, with some refineries in the process of converting to biofuel plants and others closed down altogether. And demand is still some way from its peak in the northern hemisphere summer, with major export destinations such as the US yet to start pulling European volumes in a meaningful way.

Just 350,000t of gasoline departed northwest Europe for the US in March, according to Vortexa data, down from over 1.2mn t in the same month a year ago. April departures are up to around 625,000t so far, but are unlikely to match last year's April figure of over 1mn t. European exports to the US, the world's largest gasoline market, regularly top 1mn t/month during the summer, with the region in a prime location to fill any shortfall in US domestic supply. European gasoline is still relatively expensive, so volumes are staying largely within the region for now, but as US demand increases, any unplanned refinery outage on the US Atlantic coast or a hurricane in the US Gulf have the potential to send the European market into a spin.

Gasoline is in short supply globally. Asian gasoline margins are at multi-year highs on the back of unplanned refinery shutdowns and some unspecified delays in loading gasoline cargoes from Singapore. Chinese refinery run rates have dropped to their lowest in two years as the country deals with its worst Covid outbreak since the start of the pandemic by enforcing strict mobility restrictions in Shanghai, Beijing and other areas. And on a structural level, China has reduced its gasoline exports sharply as it tries to reduce energy consumption and cut carbon emissions from refining.

By George King Cassell