As Gasoline's Appeal Fades, Refiners Chase Next Profit

Posted by Joseph Keefe June 16, 2016

Diesel gets boost from Asian heat, French strikes.

Just as drivers hit the road for summer holidays, refiners are turning the taps down on gasoline as a global excess cuts into their profits.

Refiners in Europe, Asia and the United States, from the mighty ExxonMobil down to smaller players such as Italy's Saras, amped up the proportion of gasoline they churned out to cash in on record driver demand.

But now they are moving back to the diesel, jet fuel and heating oil that for more than a year had become a "by-product" they did not want.

"The pendulum of profitability between gasoline and diesel is set to swing back toward the latter during the next 12 months," ESAI analyst John Galante said in an annual forecast. "Tightness in the global gasoline market has run its course."

Already, Europe's refineries are moving towards diesel, traders said, while Asian units are maximising jet fuel. In the United States, Husky Energy (HUSKF) in Lima, Ohio, is making more diesel, while Delta Air Lines (DAL) is considering switching its Trainer, Pennsylvania refinery to maximise diesel.

The shift is due in part to the success of their own efforts to do everything they could - from choosing different crude oil to tweaking the way they ran their units - to capitalise on booming gasoline and naphtha demand.

Most can only shift a small amount of production from one product to another - less than 5 percent, even in a best-case scenario - but the worldwide effort had a big impact.

Physical supply of so-called light-end products built quietly on ships, at refineries and in storage tanks, with even China exporting gasoline to the United States. The figures are now showing up in official data.

According to Euroilstock, gasoline inventories in Europe clocked a counter-seasonal build of 3 million barrels from April to May, while even the U.S. Energy Information Administration has shown some builds in gasoline stocks despite record demand from drivers.

"It has become clear that this is really not 2015 anymore and that the effects of yield-shifting exercises across the globe have more or less taken care of what we assume to still be strong demand growth for gasoline," analysts at JBC wrote.

At the same time, an unexpected shortfall in diesel and jet fuel crept in, buoyed by strikes that closed four French refineries and extreme heat from El Nino that boosted distillates burned in power generators in India, Pakistan and Vietnam.

Last week, premiums for gasoline over ultra-low-sulphur diesel fell to flat on a per-barrel basis for the first time since March, in Europe, and November, in Asia, according to JBC. U.S. gasoline traded at a discount to diesel on Wednesday for the first time seasonally in three years <1RBc1-HOc1>.

Still, the shift could prove to be only a short-term profit aid. One trader said the change "makes little sense historically", while analysts warned it could simply crush diesel margins.

"If they are forced to make more diesel it will undermine those economics, particularly as August is typically a slow period for demand," said Robert Campbell, head of oil products with Energy Aspects.