Gasoline feels the impact from rising volumes of U.S. Shale

  • 7 Mar 2019
  • By Paul Wightman
  • Topics: Energy

The production of light crude oils and natural gas liquids (NGLs) are increasing in many regions including the United States, where there has been a surge in the output of shale oil. Refiners are choosing, in some cases, to refine greater volumes of these crude oils and NGLs. However, as more volumes are refined, there is a direct impact in the refined products markets for light ends such as gasoline. Refinery yields for gasoline are typically much higher for lighter crudes as they are simpler to process than some of the heavier and sourer alternatives (without extensive secondary processing capacity). The much greater availability of gasoline on offer by refiners has directly impacted stock levels on a global basis and this has pressured prices in the U.S., Europe and Singapore.

U.S. gasoline stocks hit an all-time high of 259 million barrels in January 2019, based on data from the U.S. Energy Information Administration (EIA)1. However, the impacts have been felt more broadly at a global level. Over the past 12 months to January 2019, light distillate stocks including gasoline and naphtha in the United States, Singapore, Japan and Amsterdam-Rotterdam-Antwerp rose by 21 million barrels. Stocks in these locations are at their highest level since 2005, according to consultancy Facts Global Energy (FGE)2. Gasoline prices in the U.S., Europe and Asia have fallen sharply since October 2018 as stock levels rose. In the main trading centres in the U.S., Europe and Asia, prices have fallen by around $300 per ton ($36 per barrel) with suppliers chasing a more limited number of outlets for their cargoes.

Chart 1: NYMEX RBOB Gasoline Front-Month Futures

Gasoline prices have fallen sharply in the U.S., Europe and Asia.

U.S. crude production growth continues to drive global crude supplies

U.S. crude oil production, which is largely light sweet, has nearly doubled in the previous eight years to hit a peak of 11.9 million barrels per day in November 2018, up 1.7 million barrels per day from the prior 12 months, according to the U.S. EIA3 (see Chart 2). U.S. field production of NGLs rose 700,000 barrels per day between January and November 2018 to 4.5 million barrels per day. At a time of growing U.S. output, the International Energy Agency (IEA) noted that OPEC crude supply in January 2019 was 30.8 million barrels per day, the lowest level for four years4 on the back of recent agreements to scale back production. Most of the OPEC cuts have been the heavier and sourer crudes.

Chart 2: U.S. Field Production of Crude Oil

U.S. crude oil production hit a peak of 11.9 million b/d in November 2018

Source: EIA

The Permian basin in Texas is one of the core U.S. crude producing basins and the largest contributor to overall U.S. production growth. EIA5 data shows that crude oil production in the Permian increased 1 million barrels per day to 3.8 million barrels per day in the 12 months up to February 2019. The total rig count in the Permian increased from 432 to 485 over this period, edging closer to the record rig levels seen during the second half of 2014.

U.S. exports record volume of crude

European and Asian refiners have been buying U.S. crudes in greater volumes. In November 2018, U.S. crude exports hit a record 2.3 million barrels per day. Based on annualised 2018 volumes from the EIA statistics6 (using the January to November 2018 data) total U.S. crude exports to Europe were 181 million barrels (nearly 500,000 barrels per day) and around 311 million barrels (852,000 barrels per day) to Asia, up sharply from the prior 12 months.

Production from the onshore fields in the U.S., referred to as the “lower 48” was around 11.4 million barrels per day in November 2018. Splitting out the data by crude quality, the EIA data shows that 7.9 million barrels of the total U.S. lower 48 volume was light crude or condensate meaning that it has an API gravity of between 35.1 and 55 degrees. In the Permian basin, around 65% of the total crude oil produced between January and November 2018 had an API gravity of between 40.1 degrees and 50.1 or higher. The EIA breaks the data out by the main U.S. producing regions in chart 3 below. Refinery processing of lighter and sweeter crude oil typically yields larger volumes of light end products such as gasoline and naphtha.

Chart 3: Lower-48 Onshore Production by Basin

65% of crude oil produced Jan-Nov 2018 had an API gravity between 40.1 – 50.1 degrees

Source: EIA

Strength in distillate providing support to weakening gasoline margins

The latest reported refinery margin figures for December 2018 from the IEA/KBC Monthly Global Indicator Refinery Margin report7 show Northwest Europe Brent cracking margins at $3.29 per barrel and hydroskimming Brent margins at $1 per barrel, down sharply from September 2017. Singapore Dubai cracking margins in December 2018 were $2.24 per barrel with Dubai hydroskimming margins at $0.40 per barrel, also down at much lower levels compared to 12 months earlier. The report shows higher refinery margins for the U.S. Gulf Coast, but part of this reflects the highly sophisticated nature of the refining infrastructure and access to cheaper feedstocks compared to other regions. Where U.S. crude prices have traded at a discount to some non-U.S. grades Gulf Coast refiners are able to benefit due to their ability to process higher volumes of U.S. grades.

Rising gasoline yields having continued to contribute to an overall increase in gasoline inventory levels. Between June and November 2018, U.S. gasoline yields increased from 44.8% to 47.2%, according to the EIA, boosting overall volumes of gasoline. Outside the U.S. gasoline is a significant contributor to the European and Asian refining markets, however, the typical crude oil diet and the set-up of the refinery units means that middle distillates are also significant products. In November 2018, Eurostat data shows gasoline represented around 21% of total refined product output with distillate at 45% in the European Union. Rising distillate cracks have lent some support to refiners at a time of gasoline weakness.

The futures market illustrates the current weakness in gasoline. Euro-bob gasoline crack spread futures for March 2019 and April 2019 delivery traded to as low as zero in January 2019 (see chart 4). The second quarter is the period where refiners build stocks ahead of the peak demand summer season. However, refiners are entering the summer season with much higher stocks than in previous years and this is being reflected in trading values in the futures market. Prompt Singapore gasoline cracks traded below zero between November 2018 and early February 2019. Since July 2018, gasoline cracks for March and April 2019 delivery have fallen from over $6 per barrel to settle at -$0.42 and -$0.17 per barrel respectively on 13 February 2019.

Chart 4: Futures Crack Spread Prices Fall, Denting Refinery Profits

Upcoming 2019 summer season stocks higher than previous years

In contrast to gasoline, the middle distillate markets have remained relatively strong, providing a welcome boost for refiners. In the short-medium term, higher volumes of middle distillates are expected to be used as blending fuels in the 0.5% bunker market in the run-up to the new International Maritime Organisation (IMO) regulations in 2020, which should provide some support to distillate margins. The prompt month New York Harbor ULSD crack spread strengthened to around $26 per barrel in January 2019. Over the same time period the prompt month gasoline crack spread declined to around $5 per barrel (see chart 5). In Europe, the low sulphur gasoil crack spread was also relatively strong compared to gasoline, trading at around $16 per barrel in February 2019, up around $12 per barrel from February 2018.

Chart 5: NYMEX ULSD Crack Spreads vs RBOB Gasoline Crack Spreads vs WTI

January 2019 ULSD Crack Spread $26 per barrel; Gasoline Crack Spread $5 per barrel

The outlook for European diesel demand remains uncertain as passenger trends are changing. According to the latest data from the IEA, the transition from diesel to gasoline in the European road transport sector continues to take hold. Such a transition could potentially provide a more positive demand outlook for gasoline in the short-medium. In 2018, the market share for new car registrations was 32% diesel down from 39% in 20178. One possible reason for the decline in diesel usage could be attributed to the Volkswagen scandal on emissions from 20159.

Over the longer term, the broader outlook for the demand of road transport fuels remains unseen. There are challenges to this segment from technological advancements with electric or hybrid vehicles which may threaten the demand outlook for both gasoline and diesel. However, the overall numbers on the take up of these types of vehicles being reported are relatively small to be a meaningful threat to the broader oil industry for now. The IEA’s June 201810 report (see chart 6) said that the global stock of electric cars was just over 3 million, but this was expected to rise in the years ahead.

Chart 6: Global Use of Electric Vehicles by Region

Over 3 million electric cars available globally10

Source: IEA – June 2018 report


The rising availability of light sweet crude oils and NGLs are bringing higher volumes of light end products to the market as refinery yields for these feedstocks are higher than for sourer crudes. Prices for gasoline in the U.S., Europe and Singapore have fallen sharply as stocks have continued to build to multi-year highs. Refinery profitability for light end products is falling with crack spreads dropping close to zero, reflecting higher stock builds in many locations. Conversely, middle distillate markets are benefiting, primarily from the prospect of higher blending rates into the bunker pool ahead of the new bunker regulations in 2020.

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