Refining The Argument
To date, 2010 has been a roller coaster ride for refiners, with extreme weather conditions helping margins widen in January, before rising temperatures undermined the recovery. More snow in February again helped products prices and margins but the underlying trend remains weak. Given poor downstream profitability for the oil majors in Q409, some may trim their portfolios - if they can find buyers.
Even though crude oil prices fell steadily in January, refiners curtailed purchases in line with lower global refinery throughputs and in preparation for heavy spring plant maintenance. Refinery utilisation rates in the US slid to just 79.1% in January from 80.3% in December, whereas typically they should be around 90%. European utilisation fell to 81.5% in January from 82.3% the previous month.
Product prices lagged the crude market trend, with margins in most major markets seeing month-on-month gains. Europe outperformed Asia and the US as demand from other regions for gasoline and naphtha drove up prices. Brent margins, barely above break-even in December, widened to more than US$2 per barrel (bbl) in January.
Strong Asian demand for petrochemical feedstock buoyed naphtha prices and margins, continuing the trend that began to develop in December 2009. In Northwest Europe, naphtha crack spreads more than doubled between January and December, reflecting increased exports to Asia.
In Asia, there are still mixed developments. Chinese refiners have been running at maximum capacity but most other countries are operating below seasonal norms. Japan experienced a slight improvement in January utilisation.
While severe winter weather in February may have spared refiners any further pain, the relief could prove short-lived as an end to winter is in sight and underlying demand trends have yet to improve. Refiners remain hampered by the generous global products stocks and the outlook for Q2 is not encouraging - particularly if crude prices begin to rise again.
According to the EIA, US distillates demand on average plunged by more than 9% in the four weeks to 29 January from the year-earlier level. Net selling by speculators of heating oil futures hardly helped, although Washington's February snowfall suggests that they got their timing wrong.
The European distillates market was relatively strong owing to fewer imports from the US and planned refinery maintenance. Middle distillate prices in the Mediterranean market rose on the back of strong demand and moves were expected to reduce floating stocks. Once recent cold weather clears, however, it is hard to see anything other than a fresh downturn in European distillates.
Asian distillate prices and margins were gaining ground in January, aided by European heating oil demand, upcoming fuel specification changes in India and some refinery outages. China's growing refining capability means more diesel and other distillate products on offer for the region, which may dampen market enthusiasm later in the quarter.
During January, the BMI-calculated global jet fuel price was US$86.71/bbl, with almost US$82.00/bbl predicted for February if the products price tracks crude. For the whole of 2010, we are currently assuming an average price of almost US$95.00/bbl, compared with an estimated US$70.66/bbl in 2009.
The January 2010 average global gasoil price, calculated by BMI, was US$83.59/bbl. In February, the price is expected to average around US$78.84/bbl. For the whole of 2010, the current estimate is for an average price of US$91.89/bbl, compared with an estimated US$68.96/bbl in 2009.
Naphtha Still Needed
While January European naphtha prices were slightly lower than in December as output rose, the market could remain strong amid persistent arbitrage opportunities to Asia and improving economic growth prospects. The Asian naphtha market was also strong in January amid flourishing regional demand, but arbitrage cargoes from Europe and the Mediterranean put pressure on the market.
Calculated global naphtha prices in January are put at US$79.23/bbl, closing the previously wide gap against the mainstream products thanks to strong demand. In February, we are assuming US$74.77/bbl and the 2010 average is estimated at US$81.26/bbl - up from US$59.30/bbl in 2009.
Gasoline In Low Gear
There has been some improvement in the gasoline market but the recovery appears fragile. Only reduced refinery utilisation has kept prices up, with futures market activity generally negative. By beginning US refinery maintenance early and switching gasoline production to summer grades in March, market sentiment could improve somewhat.
In Europe, gasoline market strength reflected export opportunities to the US, Brazil, Nigeria and Iran. Early refinery maintenance could again help the near-term trend, with Europe potentially remaining the strongest market in the spring. Asian gasoline crack spreads rose sharply in January thanks to increasing demand from Indonesia and India, as India started to buy in the spot market prior to the launch of cleaner fuels. This helped offset the bearish impact of Chinese gasoline exports.
In January, the calculated BMI global premium unleaded gasoline price was US$86.65/bbl, with US$82.89 expected for February. For the whole of 2010, BMI is now forecasting gasoline at an average US$95.96, up from an estimated US$70.17/bbl in 2009.
The EIA predicts that US regular grade motor gasoline prices will average US$2.84 per gallon in 2010 and US$2.97/gallon in 2011. Average pump prices may top US$3/gallon at times during the upcoming spring and summer
Source: Allbusiness.com
