Once the oil industry’s star product, gasoline is now losing oil refineries money in Europe and has plunged in value against diesel, its main competitor.
How did this happen? Here’s a run-through of what’s taken place in a more than $1 billion a day business and how the world’s oil refiners might respond.
The simple answer is that gasoline supply has massively outpaced demand. That’s illustrated in data from the U.S. — by far the world’s single largest gasoline consumer — which shows stocks at record seasonal highs since the start of September.
A second issue is the kind of crude oil the world is pumping. Where output is growing fastest, notably in the U.S., the extra barrels have tended to be lighter and therefore rich in gasoline. By contrast, the supply of diesel-yielding oil from the likes of Venezuela and Iran has been more constrained.
Gasoline’s value against diesel started collapsing around August and hasn’t stopped sliding since. In Asia, Europe and even the U.S. — which consumes over 9 million barrels of gasoline a day — diesel is now around an average of about $70 a ton more expensive.
High stocks and seasonally weak demand are set to keep dragging on gasoline prices, according to Jonathan Leitch, senior oil products analyst at Wood Mackenzie Ltd., an energy consultant. And as long as diesel margins remain attractive, refiners will keep running hard and, in doing so, inevitably produce more gasoline, further pressuring margins.
In Europe, gasoline is now worth less than the crude used to produce it — a bizarre scenario last seen back in late 2011. Today in the U.S., and also in Asia, refiners’ profits from gasoline production have collapsed.
“The recent weakness in gasoline is hurting FCC refiners in particular,” said Leitch. FCC stands for fluid catalytic cracking, a relatively sophisticated refining process that churns out high proportions of gasoline and other light fuels. “This could cause them to reduce throughputs at FCC units to cut the yield of gasoline from the refinery as a whole.”
Close to Fuel Oil
The situation for gasoline has gotten so bad it’s now practically the same price as high-sulfur fuel oil — a waste product made by refineries that’s normally sold to power generation and shipping industries — flouting market norms. Along with low gasoline prices, recent gains in fuel oil values as global supplies tighten have helped to decimate this spread.
“Something’s got to change because the values are out of line,” says Leitch, adding that he sees gasoline remaining weak through the winter.
With their star product making a loss and little chance of a rally, refiners are faced with a difficult choice. They could turn off their FCCs, but potential problems when they restart are likely to scupper that idea, Leitch says. Instead, refiners will be thinking about reducing run rates at these units, he says.
Oil companies rarely comment on such commercially sensitive operational details. But until either supply is reduced or demand picks up, gasoline is set to remain refiners’ problem child.