Gasoline appeal fades as refiners chase the next profit boost

RefineryI saw an online article today from Hydrocarbon Processing about how profits are slowing related to gasoline, but diesel is coming back. This article reminded me of the September 2015 HP article, “Improve Refinery Flexibility and Responsiveness”, and how refiners need to be flexible to take advantage of market changes and opportunities.

LONDON, June 16 (Reuters) - Just as drivers hit the road for summer holidays, refiners are turning the taps down on gasoline as a global excess cuts into their profits.

Refiners in Europe, Asia and the US, boosted the proportion of gasoline they churned out to cash in on record driver demand.

But now they are moving back to the diesel, jet fuel and heating oil that for more than a year had become a "by-product" they did not want.

"The pendulum of profitability between gasoline and diesel is set to swing back toward the latter during the next 12 months," ESAI analyst John Galante said in an annual forecast. "Tightness in the global gasoline market has run its course."

Already, Europe's refineries are moving towards diesel, traders said, while Asian units are maximizing jet fuel. In the US, Husky Energy in Lima, Ohio, is making more diesel, while Delta Air Lines is considering switching its Trainer, Pennsylvania refinery to maximize diesel.

The shift is due in part to the success of their own efforts to do everything they could - from choosing different crude oil to tweaking the way they ran their units - to capitalize on booming gasoline and naphtha demand.

Most can only shift a small amount of production from one product to another - less than 5%, even in a best-case scenario - but the worldwide effort had a big impact.

Physical supply of so-called light-end products built quietly on ships, at refineries and in storage tanks, with even China exporting gasoline to the United States. The figures are now showing up in official data.

According to Euroilstock, gasoline inventories in Europe clocked a counter-seasonal build of 3 MMb from April to May, while even the U.S. EIA has shown some builds in gasoline stocks despite record demand from drivers.

"It has become clear that this is really not 2015 anymore and that the effects of yield-shifting exercises across the globe have more or less taken care of what we assume to still be strong demand growth for gasoline," analysts at JBC wrote.

At the same time, an unexpected shortfall in diesel and jet fuel crept in, buoyed by strikes that closed four French refineries and extreme heat from El Nino that boosted distillates burned in power generators in India, Pakistan and Vietnam.

Last week, premiums for gasoline over ultra-low-sulfur diesel fell to flat on a per-barrel basis for the first time since March, in Europe, and November, in Asia, according to JBC. U.S. gasoline traded at a discount to diesel on Wednesday for the first time seasonally in three years.

Still, the shift could prove to be only a short-term profit aid. One trader said the change "makes little sense historically", while analysts warned it could simply crush diesel margins.

"If they are forced to make more diesel it will undermine those economics, particularly as August is typically a slow period for demand," said Robert Campbell, head of oil products with Energy Aspects. 

(Additional reporting by Jarrett Renshaw and Devika Krishna Kumar in New York and Seng Li Peng and Roslan Khasawneh in Singapore; Editing by Dale Hudson)


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  • Complementing your article, EIA has publish the recent article titled, Higher US gasoline production, inventories are reducing gasoline crack spreads. 

    Here are the highlights, from my perspective:

    While lower economic growth in developing countries and increased distillate exports from the Middle East and China led to high distillate stock levels in major storage hubs, the drop in crude oil prices in late 2014 was one of many factors that led to an increase in gasoline demand, both domestically and abroad.

    US refiners are shifting their output mix to increase the gasoline production share and reduce the distillate production share, which is increasing gasoline inventories and beginning to reduce the gasoline crack spread—the difference between gasoline futures prices and crude oil.

    Monthly average gasoline crack spreads are now lower than they were last year, the second consecutive month of year-over-year declines. While distillate crack spreads are also lower than last year, they are only $0.03/gal lower than the five-year average and have increased $0.09/gal over the past two months. Changing gasoline-to-distillate production ratios are a contributing factor in the difference in crack spreads.

    The US gasoline-to-distillate production ratio began increasing in 2015, reversing a several-year decline. In May 2016, the gasoline-to-distillate production ratio reached a five-year high of 2.12. Over time, refineries have some ability to adjust petroleum product yields in response to changes in price signals by adding additional equipment or modifying processes and feedstocks.

    A way for refineries to gauge product value is to look at the prices of futures contracts for delivery of a product at a future date. Because both gasoline and distillate prices exhibit seasonality in the summer and winter months, averaging the front-month and sixth-month futures contract price of each of the gasoline and distillate contracts and then calculating the price spread between the two averages provides insight into the price spread between these two physical products without reflecting sudden seasonal price swings that occur throughout the year.

    From 2010 to 2013, US refineries increased production of distillate compared with gasoline because the average price of the New York Harbor distillate contract, which began trading ultra-low sulfur diesel (ULSD) in the spring of 2013, rose compared with the reformulated blendstock for oxygenate blending (RBOB, the petroleum component of gasoline) contract over that period. The strength in distillate prices was in response to rising distillate demand in developing countries, while US demand for gasoline was stagnant or declining during much of that time.

    However, in 2015, the trend changed, as the price of RBOB futures contracts rose compared with distillate contracts because of lower distillate demand and higher distillate inventories globally. Lower economic growth in developing countries and increased distillate exports from the Middle East and China led to high distillate stock levels in major storage hubs, including Singapore, northwest Europe and the US. On the other hand, the drop in crude oil prices in late 2014 was one of many factors that led to an increase in gasoline demand, both domestically and abroad. These developments spurred US refineries to increase gasoline yields, which is contributing to the rise in overall U.S. gasoline production. In 1Q 2016, total US refinery and blender net production rose 0.82%, compared with the same period in 2015. During the same span, gasoline production rose 2.18%, while distillate production declined 2.56%.

    Inventories of both gasoline and distillate have been above the five-year historical range for most of 2016. As refineries increased gasoline production to meet rising demand, US gasoline inventories leveled off after months of declines but are still well above the five-year range. On an absolute basis, gasoline inventories are 19 MMbbl greater than at the same time last year, and distillate inventories are also 19 MMbbl higher.

    On days-of-supply basis, taking into account both domestic consumption and exports, US gasoline inventories can fulfill an additional day of total gasoline demand than the same period last year. The year-over-year change in days of supply for gasoline gradually increased since February. Alternatively, the decline in distillate production and a slight strengthening of distillate demand following a very warm winter in the Northeast reduced the year-over-year change in distillate days of supply from a high of nearly 11 days in February to 3.2 days, according to the latest Weekly Petroleum Status Report.

    For the complete report, logon to
    (Source: EIA)

    Marcelo Carugo

    Global Refining Industries