Two weeks ago, when looking at the “Holy Mess that is PADD 1”, we asked “Is This What Finally Drags Crude Oil Lower.” We were referring to an unprecedented gasoline glut. This is what we said:
Several months ago we reported that the next big threat to oil prices had nothing to do with oil fundamentals, either lack of demand or excess supply, or technicals, i.e., algo buying or selling, and everything to do with the upcoming glut of the most important crude byproduct: gasoline.
We concluded by saying that “with the inventory bottlenecking having reached all the way to the gasoline level, in lieu of refiner buying, crude producers will be forced to start selling oil and dumping prices just to get marginal demand as both onshore and offshore storage is near capacity. Most likely this will happen in the next few weeks, when coupled with the near full Chinese SPR, the slump in Chinese oil demand, the elimination in Nigerian supply overhangs, the resumption of Libyan exports, it will send the price of oil tumbling, and incidentally replaying the summer of 2015 when crude crashed…”
One week ago we reemphasized the point, when we pointed out that Chinese refiners are now flooding the world with gasoline exports due to lack of domestic demand.
Today, it appears that this story has reached the mainstream and as a Bloomberg note titled “WTI Drops as Gasoline Glut Weighs on the Market” it quotes an expert who says precisely what we have been warning about for the past few months, to wit: “we are gradually shifting from a crude glut to a refined product one, particularly in gasoline,” Thomas Finlon, director of Energy Analytics Group said by phone “The gasoline production numbers in the United States are just astounding.”
The China gasoline export story is also attracting attention.
In a separate note Bloomberg writes, that “the volume of China’s gasoline exports caught up with diesel last month as refiners dumped excess output in overseas markets to alleviate swelling stockpiles at home amid record domestic production. The world’s largest energy consumer more than doubled shipments in June compared with a year earlier to a record 1.1 million metric tons, or about 312,000 barrels a day, data from the General Administration of Customs in Beijing showed on Thursday. Exports of the motor fuel increased 75 percent to 4.45 million tons between January and June. Diesel volumes slowed to 1.1 million tons, the lowest level in four months even as overseas sales in the first half of the year more than tripled to 6.6 million tons.
The country processed a record 11 million barrels a day of oil in June, boosting gasoline output by 8.7 percent to the highest monthly level ever. The nation’s refiners have been adjusting their facilities to maximize gasoline production at the expense of diesel to take advantage of robust vehicle growth in the world’s largest auto market. Commercial gasoline inventories increased to a record 7.83 million tons at the end of May, according to data released by Xinhua’s Oil, Gas & Petrochemicals newsletter.
Bloomberg adds that “the flood of shipments from China is exacerbating a glut of fuel across Asia, where processors are cutting operating rates as they grapple with a slump in refining margins. The profit from turning benchmark Dubai crude into oil products in the region has averaged less than $6 a barrel in the first six months of 2016, compared with $8.25 in the same period last year, data compiled by Bloomberg show. “Gasoline supply growth is outstripping consumption growth in China, while exports are also growing in the likes of South Korea and Japan,” Peter Lee, an analyst with BMI Research, said in an e-mail. “There’s not only an apparent oversupply of gasoline in China, but also across the whole region as well.”
With local teapot refiners now mostly in “gasoline-only” mode, it appears that the global gasoline glut is about to hit unprecedented proportions: “China started to flood regional markets with diesel from the middle of last year as stockpiles swelled amid slowing industrial activity at home. Gasoline may become the “next diesel” if demand doesn’t pick up significantly, Lee said in May. “
But the punchline is that as Chinese exports soar, suddenly there is nowhere to store the product. Dutch consultancy PJK International said that gasoline stocks held independently in the Amsterdam-Rotterdam-Antwerp (ARA) hub rose more than 12% to an all-time high in the week to Thursday,
“We saw less export volumes, that’s the main reason,” PJK’s Patrick Kulsen said of the rise in inventories of the motor fuel. “It fits with the market. We have a contango structure, we have a stock rise in the U.S.,” Kulsen added.
The reason there is less export volumes is because China has stepped in and is now exporting deflation in the form of underpriced gasoline to importers.
Which brings us to the most troubling chart yet: the US gasoline crack spread, a proxy for refiner margins, continues to plumb record lows level for this time of the year, and is almost half where it was last year, suggesting that the pain for US refiners, already flooded with gasoline is about to get much worse.
There are two key implications: i) the frequently touted surge in gasoline demand was simply not there and either gasoline prices will have to tumble to force the liquidation of excess gasoline stocks, leading to another leg lower in crack spreads, or gasoline storage will simply overflow and ii) this bottlenecking will continue to push back on the back-end of the supply chain, prompting refiners to reduce runs even further, causing another surge in oil inventories in the coming months and unleashing the next leg lower in crude prices, at precisely the same time as this happened in 2015.
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