European oil product prices continued to spike Wednesday, led by gasoline, as the supply implications of the impact of Tropical Storm Harvey on the US Gulf Coast’s refining hubs reverberated through the region.
With up to a fifth of total US refining capacity, or some 4 million b/d, still offline, markets are looking to Europe to provide clean product to markets the USGC normally supplies, such as Latin America, Brazil, Argentina and even the US West Coast.
Shipping sources have already reported a flurry of trans-Atlantic fixtures and surging freight, with demand for gasoline shipments westwards the key driver.
European gasoline prices have soared over two consecutive trading sessions on extra demand for cargoes required on the US Atlantic coast to substitute supply unable to leave the US Gulf Coast.
The September Eurobob gasoline crack swap was assessed at $18.30/b Wednesday, up $2.80/b on the day, adding to the $1.35/b gained during the previous session, S&P Platts data showed. It was the highest level since August 13, 2015, when the crack swap was assessed at $18.85/b.
Elsewhere in the paper market, the prompt strength caused the September/October Eurobob gasoline backwardation to widen to $57.75/mt, from $43.25/mt.
Additional demand for gasoline shipments west from Europe also was the key driver behind a spike in Medium Range tanker freight rates west of Suez. The UK Continent-US Atlantic coast route, basis 37,000 mt, was assessed at Worldscale 215 Wednesday, up w55 from Tuesday.
The rapid change in rates was reflected in fixtures reported, with a number of tankers heard on subjects to go the US Atlantic coast at freight rates up to double those seen last week.
“The question really is now which ships will fail and which will be fixed, at the moment it is really all over the place,” a broker said. “We’ve seen all kinds of numbers rumored to be on subjects, and it all really depends on how long those US refineries will be out.”
The halt in US middle distillate supply was also supporting the NWE and Mediterranean diesel markets.
The front-month ICE low sulfur gasoil/Brent crack swap rose $1.26/b to around $14.80/b on Wednesday, the highest since May 2015.
Given the disruption to US diesel exports, there was talk of a possible reverse arbitrage from Europe to the US emerging, according to sources, but so far there was scant evidence of this.
The possibility of Europe supplying Latin America was perhaps the more likely outcome initially, but so far market participants were holding off, awaiting further clarification on the situation in the US.
While any reverse arbitrage on diesel would only be at an embryonic phase, for its distillate cousin jet, things were looking more clear cut.
A number of cargoes originally destined for Northwest Europe were diverting across the ocean to meet demand for jet fuel in North and Central America.
In the first sign of this “reverse arb” opening from Europe to the US, the Hafnia Adamello, a 39,807 dwt vessel, was placed on subjects to carry a 30,000 mt cargo of jet from Milford Haven on September 6 across the Atlantic to supply the US market, according to shipping sources.
“I think all the ships on the water are trying to negotiate US options,” a trader in the US said. “Ship owners of course wanting to be paid mightily for this,” the trader added.
Naphtha gasoline blending demand was rising Wednesday, as demand for NWE gasoline imports increased in the US amid the refinery closures there.
Volatility caused by Harvey has been heavily reflected in the paper market on expectations that opportunities for arbitrage trade from Northwest Europe to the US will open up.
Crack swaps were seen trading at $1.85/b Wednesday, after hitting $1.05/b Tuesday. The backwardation between the front and second months was seen trading around $4.75/mt Wednesday, after hitting $3.25/mt Tuesday, a month high.
In the European VGO market, the key export trade of several hundred metric tons per month to the US Gulf Coast has been put on hold.
“Everyone is waiting to see what happens in the Gulf,” said one European feedstocks trader.
This was creating uncertainty in the European market, which typically trends towards freight netback levels from the larger US demand center.
None of the major US refinery buyers of the feedstock were seen in the market Wednesday, and traders could only guess at the speed at which they would be able to get back online, noting FCC margins would be soaring from the tighter gasoline market that has resulted from the offline capacity.
RISK OF PROLONGED OUTAGES
While some US Gulf Coast refiners began flagging expected restarts Wednesday, the market remains focused on the risk of protracted disruptions if plants are damaged or hit glitches while restarting.
Based on what happened after hurricanes Katrina and Rita, which hit the US separately in 2005, Goldman Sachs estimated that some 10% of the currently offline capacity, or around 400,000 b/d, could remain unavailable for “several months.”
With a “large chunk of US refining capacity down, it’s down to Europe as the swing producers,” according to WoodMac’s research director Jonathan Leitch, who noted that Europe has spare capacity and a surplus of gasoline.
In the short term, the shipments of gasoline to the US are set to provide a further boost to the already strong refining margins in Europe, Leitch said.
However, that boost may prove to be short-lived, as after storms “refineries tend to get back in operation a couple of weeks later,” said Leitch, adding that refineries in the US Gulf Coast have mostly suffered from the impact of flooding rather than structural damage.
“You can get the cargoes from long-haul just as refineries are coming back,” Leitch added.
The arrival of European cargoes would coincide with the end of peak US driving demand, coupled with the seasonal change of gasoline specifications. In addition, local demand in Houston is also down due to the flooding.
“People send a lot of cargoes, too much arrives and crack spreads deflate,” Leitch said.
LIGHT EUROPEAN MAINTENANCE
European refinery maintenance was not seen as likely to significantly hinder trans-Atlantic product movements, as many plants are small with few exports to the US.
Scheduled maintenance will mostly impact smaller refineries in Scandinavia, including Sweden’s Gothenburg, Finland’s Naantali, Denmark’s Fredericia and Norway’s Slagen, according to market sources. The plants are scheduled to enter maintenance during September.
The various unplanned outages in Northwest Europe throughout August have largely been resolved.
Shell’s Pernis, the biggest refinery in Europe, restarted following incidents in late July. ExxonMobil’s refinery in Rotterdam had an outage of one unit but the rest of the refinery is operating, while some issues at German refineries had been resolved.
Partial works are expected this autumn at Total Antwerp and BP Rotterdam, according to sources.