Summer Outlook and Regulatory Impacts

Hello, and welcome to the Platz Oil Markets podcast by S andP Global Energy. Where today we will be talking about supply, demand and pricing for road transportation fuels as we enter the summer driving season I'm Gary Clark, and I manage the EmIA Clean Refined Products Pice Reporting team based out of London. I'm joined by Friedrich Guchcher, who reports on gasoline and Sfia Aang, who sits on the middle Distillates team and looks at diesel markets I'm also joined by Elza Turner, who looks at refineries and Russian domestic refined product markets. In the week starting june fifteenth, media reports suggest that the US and Iran have reached a deal to stop the war that disrupted oil flows through the Strait of Hogmz Plats reported the import cargo price of thirty thousand tes of diesel into Northwest Europe at nine hundred and thirty nine dollars on june sixteenth, down by around forty percent from a high on april the second of nearly sixteen hundred dollars per metric ton Similarily, the wholesale import price of gasoline into the UK is at around nine hundred and ninety dollars per metric ton Down from twelve hundred and fifty dollars per metric ton. on may eighteenth Prices have come down, but should hostilities continue and disruptions to refined product supply remain, there are concerns around security of supply as we enter the summer driving season, when demand for road fuels and jet fuel as well traditionally rise So coming to you first Friedrich on gasoline. So obviously we've continued to see supply disruptions through the Strait of Hermz prrices is still relatively high, alough they have fallen from their peaks during the war. High prices traditionally bring around demand destruction to bring us a level of balance to the market. What are you seeing in terms of gasoline markets Yeah, I mean, since the start of the war, as you've rightly pointed out, UK wholesale prices have skyrocketed quite significantly, peaking in May But interestingly, since that period, we've been seeing a sort of relief in the market brought down prices again by about twenty percent as the market now remains quite volatile and as headlines are driving the narrative around prices, We'll sort of see to what extent, consumers will experience the sort of relief on the actual pump So when we're talking about the pump we're speaking about, retail prices that have also been going up since the start of the war, but have recently sort of come down again. as we see demand destruction, as you rightly pointed out, sort of mellowing down again from the initial strain regarding supply in the market. And I think interestingly enough, If you look at data backing up this demand destruction, you see that stock levels have massively impacted the way that there is just a shortage in what the consumer can actually buy So for this year, for the first quarter, we've seen stock levels at petrol stations down by six percent over the year. As we go into this new cycle, of summer demand, we'll possibly see another uptick. in prices as despite stock levels sort of recovering from their initial drain Consumers will possibly be driving prices up again as the demand will pick up for the summer season, yes I see, okay. and that's what you're hearing from your sources, right? expecting potential tightness as we move into the summer months of gasoline. Sophia, can I ask what are you saying for diesel markets right now Yeahes, so my sources are saying similar on the diesel side. I think as we saw those extremely high prices at the beginning of April, as you said earlier, Gary, that had a trickle down effect into the pump prices and consumption at the pump level was decreasing massively but not only that, because of the way the market is structured, it was highly backidated at the beginning of April. And that desentivizes market participants from buying product in the prompt and storing it as it loses value when it's stored. So that sort of destroyed some of that buying interest that we would usually see because there was just More people were wanting to buy in the now to cover their immediate need and not wanting to store things over a long period of time. And so the two levels kind of work simultaneously at the pump and at the wholesale to take away from that demand that we're usually seeing in springtime I think now that flat price has come down quite substantially, then maybe pump prices will be easing somewhat. In April, we were seeing averages across Europe above two euros per litre. And in the UK, we were seeing averages around one patter ninety two per litre on diesel at the pump. and those have now softened around one fifty on the euro and pound. So with this falling pump price heading into summer, there is much potential for that demand to pick up I see. so we've seen demand destruction for both gasoline and diesel as a result of high prices, but flat prices have come down now and in turn that could actually stimulate a bit more demand, right. Another important part of the puzzle is also what's happening in Russia E if I could come to you, right? Because Russia both a big producer and consumer of diesel and gasoline Actually, it's a bigger producer of diesel than of gasoline. So that's the big problem because over the years Russian refineries have upgraded their diesel units. They've built enormous amount of hydrocrackers, hydrrators and so on. So they produce twwice as much as they consume. That's diesel. and that's why Russia is an important diesel exporter. But on the gasoline front, they haven't built too many FCC units. They consider this as a flaw and are now starting to look into it. There are lots of small refineries that are upgrading with new FCC units, but because of sanctions on equipment, all these upgrade projects have stalled And all the deadlines have been moved and the final commissioning is not very clear with many of them. So in reality, Russia is balanced gasoline. It produces pretty much what it consumes, just a small spare amount left for exports. And currently, it is starting to face big pressure on the supply side of gasoline, especially Because as probably our listeners know, Ukrainian drone attacks have ramped up in the recent months and a very big amount of refineries remain offline. It's very hard to pin down exactly how many because it's a very volatile situation. Some refineries restart Some of them operate at reduced capacity. Some of them are fully offline And attacks are happening almost every day. So the latest one today was on the Moscow Reinery. There was a statement from the local authorities that the refinery continues to operate normally. But whether it's really true, we don't know, the Ukrainian military said that primary processing unit has been struck, so we'll just see mostly we see the impact of these strikes from the St. Petersburg exchange where domestic products trade for domestic delivery and Gradually over the last few months, maybe two months, some refineries have disappeared as sellers from the exchange floor. so this is a clear indication that they're offline because Often getting confirmation is very difficult. And right now Russia is heading into the summer peak driving season. schoolchool holidays have started. Domestic tourism is very active and it has been since the start of the war in Ukraine because Travels further abroad are not that easy And now lots of regional authorities started reporting problems also at retail stations. So this information is not quite fully available, but from indirect sources, it becomes obvious that retail stations are increasingly starting to face problems I see so you know, a reminder there, right that the Russ you Ukraine war is indeed affecting the global oil balance, right? It's not just the events that we see with respect to Iran And the US in Esa, you mentioned the summer driving season So I mean turning to you, Friedrich on gasoline, right? The US has got a massive gasoline intensive summer driving season. What's the expectation you know, for gasoline markets as we as we move into the summer months of Europe net long gasoline exports a lot of that to the US. Yeah, so totally agree there with the World Cup now having kicked off and Also the fourth of July, celebrations in a couple of weeks happening. We will see a lot of demand for gasoline or generally road fuels in the US And as much as the US has a massive gasoline refining and blending complex in the Gulf Cast And to an extent also in the east coast of the country Often there will be seasonal shorts that need to be filled by other regions. And one of such regions is Europe, which as you rightly pointed out, is a net long gasoline producer. So when we talk about these flows that go from Europe into the Atlantic coast of the US We talk about incentives such as arbitrage incentives So basically, my purchase price is lower than my selling price. and the difference of that given the freight costs actually leaves me with a certain profit. And so market participants will be looking at capitalizing on this. When we look at the numbers, so the differential between the prices in Europe ander prices in the U.S, we see these incentives actually increasing or rising over the last three month period. So we've seen it kind of go up by about three quarters recently. That's the price in the U.S is now attractive enough to attract barrels from Europe. Correct, correct. And when we talk about this, as I mentioned, we speak of the transatlantic arbitrage. So again, the incentive to by product in the European basin, mainly talking about the Amsterdam, Rotterdam and Andwere pub as that's the sort of region in Northwest Europe where most gasoline is refined and stored. And this product will then move or has been moving into the U. S Okay, I see. so one would expect that arb to open up in the summer month, right? as a result of that increased demand in the US, but as you mentioned, fourourth of July celebrations as well as the World Cup rightright, which is presumably stimulating more driving activity in the US. Yeah. And one last thing I would add is that if you look at the freight environment that heavily plays on the incentive overall as that is the main cost factor will affect the actual flows from Europe into the US. This freight environment has been very favorable for market participants to actually act on this incentive We've seen freight for mid range cargoes going from Europe to the US drop by around forty percent over the last month So this sort of underpins the realistic outlook that we will see when it comes to these flows going from Europe into the US I see. and I guess it's similar in the way that refined product prices spiked, right, freight rates spiked as well, but now supply chains more or less have readjusted and freight prices have come down. Well, coming to you, Sophia, how do you expect the summer to affect demand for diesel Absolutely. It's a similar picture to gasoline, but it's just sort of the reverse So in Europe, we are naturally short on diesel and we rely a lot on the imports from other regions before the war Europe relied heavily on Persian gulf imports. and since the war has started, we've had to readjust and attract a lot from from the U.S, this was possible because of the high flat prices that we were seeing in Europe. that made it economically attractive to bring barrels over from the US in the opposite direction to the movement of gasoline. And so that has been supporting European supply all throughout throughout April and May in May we actually saw the highest level of diesel imports on record into Europe from the US. So that is That is something really notable. But now with the European flat price coming off and summer demand There may now be a shift in the way these fundamentals are working. We have been seeing a market that's well supplied and this low demand that we spoke about earlier was helping to balance everything given missing imports from Persian Gulf. But now if the arbitrage closes between the US and Europe, we less able to attract those U S imports And Europe is inevitably going to increase its demand to meet the needs of people driving throughout the summer, then it could be an interesting picture and we could start to see some tightness that hasn't been there recently fromom what I'm hearing traders believe that this tightness is inevitable and this demand will go up, but it's more a question of when. That being said, there's also this sentiment in the market that things have readjusted somewhat and it's going to be more than a temporary change the world may be acting differently to it was the before the war. If people have got used to taking trains, I know countries such as Lithuania have incentivized people taking trains as opposed to driving. And so if this behaviour has now become part of people's lives, it's unlikely that it will just return to the way it was before the war. And so we may now see different demand patterns do we have in previous years. In a similar way that post COVID, right people the working from home, flexi working became more of a thing relative to before exactly before COVID. And I think another interesting factor as well as we've talked about diesel talked about gasoline The jet fuel fraction kind of stuck between the two, right? And jet fuel' being the refined product which has been most affected by the supply disruption, see the straight of Homers. And jet fuel demand typically increases in the summer months as well So we're saying gasoline demand is going up and also diesel demand. So which you know, which yield Should a refinery be maximizing, right? Presumably in the US as a political incentive to keep gasoline prices low U so it seems there could be potentially competition there for yield as we move into the summer months Yes, I'm hearing on the diesel side that again, adding to the closed arbitrage situation, which could reduce imports from the US to Europe, we may also be seeing less availability of product if US refineries are incentivized to produce jet over diesel so that could be an interesting thing to look out for as well Yeah, I mean, similarly on gasoline, this has been one of the main topics that people have been speaking on Um yeah, acting on the very high refining margins that we see in the middle distillid end However If you look at the For example, one major producing region in Europe being the Mediterranean basasin, there is also going to be a sort of structural limitation as to how much this can be acted on. So according to the sources that I speak to and I pose the question of sort of the capacity that refiners are using to produce gasoline over other products, too what extent that is actually being changed? And really what the market is sort of responding to me is that So flexibility in terms of the percentage of how much refining capacity can be switched out for one or the other is fairly limited. so It ranges between five to maybe ten percent This kind of goes to show that as much as there is an incentive to switch from one to the other, overall effect will be limited. And yeah, when we are talking about sort of changes post COVID and structural change in demand and consumption in general, I think one very interesting trend that we've been picking out particularly in the Mediterranean basasin is that The overall fleet, when we talk about vehicles of new registrations for plug in hybrids. So these are mainly gasoline hybrids so using you know electric batteries as well as gasoline combustion engines has risen massively in countries like Spain and Italy When you look at the Northwest European market, actually the share of only battery powered vehicles has increased much more on that extent. So we're seeing this diversgion between plug in hybrids being much more in demand for Mediterranean consumers, meaning that gasoline demand is going up there. However, in the Northwest European Basin, we see much more electric vehicles driving the sort of the overall share or the size of the pie when you look at the fleet, so Yeah, I see. And indeed, high fossil prices do incentivize you know the energy transition right with respect to electrification of road vehicles and everything else like that. And sofere, during this crisis, we've also seen some European countries bring about regulations right to soften the blow of high fossil fuel prices for consumers. What are you hearing about that right now Yeah, exactly. Well, I think governments were facing a difficult decision of how to limit the cost impact of the war on their populations, but also ensuring that there is enough fuel to go around and how do we balance rationing versus tax reduction and things like that? So some countries such as Slovenia did take the approach of actually rationing the amount of fuel that people could buy. whereereas other countries took the more economical approach of reducing taxes to save costs for the end consumer. For example, in Germany, there was a decision made by the federal government to cut energy tax on petrol and diesel by around seventeen cents per literre from the first of May to the thirtieth of June this year. So this temporary reduction in tax obviously has a positive impact on cost for the end consumer, but it also will feed into demand. As we've discussed, high prices decentivize consumption. If the government had made a decision to cut some of those costs and bring the cost down for the end consumer, then we may see a pickup in demand as a result of some of this policy And so that's something interesting to look out for. But equally, we've seen an increase, as I mentioned in rail travel. We've also seen an increase in working from home. I think the Netherlands, for example, promoted working from home policies. If people have now adjusted to new ways of work and lifestyle, then we may see a change in demand patterns going forward I see. And with respect to regulation what are you hearing is happening in Russia, Elsa Oh in Russia, there is a massive amount of regulations. There was an export ban on gasoline which expires soon but probably will be extended. newly introduced ban on the export of jet fuel, lots of talk that maybe some of the diesel exports will be restricted, but for now there is no official decision on that matter. By the way, diesel is important in Russia during the agricultural season in the spring and in the autumn. That's its main use, basically not for cars And also Russia is the St. Petersburg Exchange is changing the bidding rules for gasoline and diesel mostly. So they're tightening the bidding steps, the increments are becoming smaller, which has restrained the price surge on the exchange floor. And this can't bring products back. So the government most recently has also extended the permission for some refineries to sell Euro three instead of Euro five gasoline and diesel. This is not very official, so it's always very hard to pin down exactly what's happening because this is mostly reported by local media And yes, there is definitely it's discussed widely in Russian circles dispermission. Last but not least, they're extending the zero import duty. Russia traditionally gets gasoline especially from Belarus because the two refineries there process Russian crude and sell some of the products back. But the Belarus refineries cannot really fill in the gap lack of local output. So we'll see how the situation develops I see, okay. Well, look, obviously there's many moving pieces to the puzzle here and we really have to see how demand is going to evolve for both gasoline and diesel in Europe and Russia as a whole as we move into the summer driving season But thank you very much for that spotlight on demand. O obbviously you know it's kind of the supply side of the equation. It's been getting all the headlines with respect to not only the Strait of Hommers, but obviously the Russia Ukraine war. So thank you, Friedrich. Thank you, Sfia Thank you, Elza and thanks for listening