According to the US Energy Information Administration (EIA) global gasoline consumption is outpacing diesel growth in 2014. At the same time, new refinery capacity engineered to produce more distillate than gasoline is coming online in 2014. The narrowing spread for December 2014 futures contracts demonstrates how these two factors may be temporarily leading to a tighter global gasoline market than was expected at the beginning of the year.
The EIA explains that the decline in December contract differentials this year is a result of both the weakening of heating oil prices and the strengthening of gasoline prices. The December 2014 heating oil-Brent crack spread averaged 42 cents/gal. in January and fell to an average in July of 35 cents/gal. In contrast, the December RBOB-Brent crack spread widened from an average of 5 cents/gal. in January to an average of 9 cents/gal. so far in July.
Weaker than expected global distillate consumption can be credited to disappointing economic growth in developing countries. EIA’s expectations for total 2014 GDP growth in countries outside the Organization for Economic Cooperation and Development (OECD) fell from 4.6% in January to 3.9% in July. China’s first quarter 2014 GDP growth was 7.4%, the lowest in a year and a half. India’s first quarter GDP growth was 4.6%, the eighth consecutive quarter below 5%, and Brazil’s first quarter GDP growth was 1.9%. the third straight quarter of lower year-over-year growth.
Weak GDP growth in emerging markets has a greater impact on global distillate demand, which is used primarily in the transportation of goods and services needed to improve or sustain the economy, than it does on gasoline demand. According to the EIA, gasoline demand is more closely related to personal income and domestic consumption.
The International Energy Agency (IEA) estimates that total non-OECD gasoline consumption growth was 3.8% in the first half of 2014, more than the consumption growth for distillate, which grew 0.7% over the same period. China’s average implied demand for diesel from January to May was 3.4 million bpd, almost 70 000 bpd lower than during the same period in 2013. On the other hand, China’s average implied demand for gasoline increased 0.2 million bpd to 2.4 million bpd. Meanwhile, the Indian government’s decision to allow increases in the price of distillate from its previously subsidized rate and review of diesel support in Europe could contribute to a shift from diesel to gasoline consumption later this year.
The expected increase in distillate supply by the end of this year is also important in explaining the main drivers to declining product contact spreads. Refiners in the US and overseas have invested heavily in new projects and expansions to attain higher distillates production yields in anticipation of strong global distillate demand growth. In general, the increase in distillate yields results in lower gasoline product ratios.
EIA highlights that refinery construction and expansion take years to plan, finance, and build. Companies undertake these projects to meet estimated demand many years in the future. Despite recent weakness, long term forecasts for growth in emerging market economies remain strong. If expected non-OECD economic growth materializes, it could lead to a return of robust distillate consumption growth.
Adapted from a press release by Emma McAleavey.
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