Gasoline: Crude Supporting Price

The upward revision of our crude oil price forecasts has pushed our gasoline price forecasts for 2014-2018 higher, as we expect the political risk stemming from Iraq to continue to support prices. Nonetheless, we maintain our view that growing production and slowing demand growth will limit both short-term and long-term price gains in New York and Rotterdam, while Singapore has better demand fundamentals supporting stronger gasoline prices.

BMI View: The upward revision of our crude oil price forecasts has pushed our gasoline price forecasts for 2014-2018 higher, as we expect the political risk stemming from Iraq to continue to support prices. Nonetheless, we maintain our view that growing production and slowing demand growth will limit both short-term and long-term price gains in New York and Rotterdam, while Singapore has better demand fundamentals supporting stronger gasoline prices.

Political Risk Sends Prices Soaring

Ukraine, Iraq Send Prices Up
New York & Rotterdam - Weekly Spot Gasoline (USD/bbl)

The upward revision of our crude oil price forecasts has pushed our gasoline price forecasts for 2014-2018 higher, as we expect the political risk stemming from Iraq to continue to support prices. Nonetheless, we maintain our view that growing production and slowing demand growth will limit both short-term and long-term price gains in New York and Rotterdam, while Singapore has better demand fundamentals supporting stronger gasoline prices.

BMI View: The upward revision of our crude oil price forecasts has pushed our gasoline price forecasts for 2014-2018 higher, as we expect the political risk stemming from Iraq to continue to support prices. Nonetheless, we maintain our view that growing production and slowing demand growth will limit both short-term and long-term price gains in New York and Rotterdam, while Singapore has better demand fundamentals supporting stronger gasoline prices.

BMI Gasoline Price Forecast (USD/bbl)
2012 2013 2014f 2015f 2016f 2017f 2018f
Crude Oil
Brent 111.70 108.79 109.74 108.00 103.00 101.00 101.00
WTI 93.30 98.01 103.08 99.00 96.00 94.00 95.00
Dubai 108.88 105.36 106.33 105.10 100.00 97.00 97.00
Gasoline
Rotterdam 121.28 115.19 116.34 114.60 110.13 107.42 107.35
New York 124.79 118.70 118.82 114.43 111.73 108.95 108.90
Singapore 123.47 115.89 117.13 115.79 112.08 109.44 109.07
Global 123.18 116.60 117.43 114.94 111.31 108.60 108.44
f=BMI forecast. Source: Bloomberg, BMI

Political Risk Sends Prices Soaring

In Q2 2014, political risk in the Middle East and in Ukraine sold gasoline trade at its strongest levels in 16 months. The differential between the lowest traded and highest traded pri ce ranged from 8.33% in Singapore to as much as 20.7% in New York.

In both New York and Rotterdam, the spike in gasoline prices took place in early April. Between March 18 and April 24, prices at Rotterdam and New York rose 13.5% and 16.6% respectively. This was mainly caused by an increase in stock-buying particularly in Europe as the region braced itself for a likelihood of a stoppage in Russian fuel supplies owing to escalating tensions in Ukraine. Iraq's political crisis in June saw gasoline prices rise in tandem with crude oil prices.

Ukraine, Iraq Send Prices Up
New York & Rotterdam - Weekly Spot Gasoline (USD/bbl)

Price movement in Singapore was less volatile in early Q2 2014, though its heavy dependence on Middle Eastern crudes similarly contributed to an upward movement in prices especially from mid-June. Unlike New York and Rotterdam, where prices eased in early July on the back of greater crude oil supply certainty, gasoline prices in Singapore continued to climb due to heavy buying from Indian refiners.

Unprotected From Iraqi Effect
Singapore - Weekly Spot Gasoline (USD/bbl)

Upward Price Revision

The upward revision of our crude oil price forecasts from 2014 to 2016 has also led to an increase in our gasoline price forecasts throughout all three markets ( see 'Oil Price Outlook - Geopolitical Risk Will Linger In Brent', July 4). However, we continue to remain more optimistic about demand fundamentals in Asia, given a stronger consumer growth story, than in Europe and US, where energy efficiency and slower growth will temper gasoline consumption growth and its longer term price trajectory.

Europe And The US:

The relative isolation of major producing fields in southern Iraq and the possibility of a resolution in Libya's political crisis - which could bring back online over 750,000b/d of crude oil - have seen a softening of both crude and gasoline prices in Rotterdam and the US. The summer driving season will prop gasoline prices up in the US, though we do not expect to see a large spike in gasoline prices from higher seasonal demand barring a political crisis.

This is due to the following factors:

  • Continued fall in gasoline demand: Growing fuel efficiency, from the uptake of less gasoline-intensive cars, and weak passenger vehicle growth in the US have seen the country's demand for the fuel fall. This is a trend that is set to continue. Gasoline demand in Europe is also expected to be moderate as the continent continues to prefer diesel-powered vehicles over gasoline.

  • Growing US gasoline production: High levels of production in the US Gulf Coast, buoyed by the US' crude oil renaissance, will continue to increase competition in the Atlantic market. Unless there is unplanned refinery maintenance, product abundance will restrict the extent of summer price increases.

2014 Output Continues To Shine
US - Gasoline Production, Jan-Jun (000b/d)

We continue to expect gasoline prices to wind down after Q3 2014 as winter approaches. This underpins our outlook for prices to average at USD116.34/bbl and USD18.82/bbl at Rotterdam and New York respectively for 2014. The same factors, combined with our expectations for crude oil prices to weaken between 2015 and 2018, contribute to our projections for gasoline to be on a downtrend.

Closing The Gap
New York & Rotterdam - Gasoline Quarterly Forecast (LHC) & Yearly Forecast (RHC) (USD/bbl)

Singapore: Strong Upside For Q314

We maintain our view that growing market demand in Asia will provide better support for prices at Singapore going forward, particularly with the continued growth in passenger car fleet in the region. Moreover, we expect the following to keep prices elevated in Q314 despite the easing of concerns over global crude oil supply:

  • Indian demand: Hindustan Petroleum Corporation (HPCL) and Indian Oil Corp hiked purchases of gasoline from Singapore in early July, helping to prop up gasoline prices. Refining outages could see further buying from India.

  • Plant outages: At its peak, Japan could see 362,650b/d of capacity out of action in Q3 2014. Japan has the third largest refining capacity in Asia. An additional 534,460b/d in the region could also be offline during the same period.

The return of some refineries online in Q4 2014, together with slower demand as winter approaches, will bring prices down in the last quarter of the year. From 2015 to 2018, we expect growing domestic production alongside lower crude prices to see a downward movement in gasoline prices. We forecast gasoline prices in Singapore to average USD117.13/bbl in 2014, but moving downwards to USD109.07/bbl by 2018.

However, we note that the election results in Indonesia and India has brought about an upside risk to our forecast particularly from late 2016/2017. Should the newly-elected government of both countries succeed in raising GDP, this would see faster-than-expected growth in incomes and consumer fuel spending.

Demand To Uphold Prices in Q314
Singapore - Gasoline Quarterly Forecast (LHC) & Yearly Forecast (RHC) (USD/bbl)

Risks To Outlook

  • Political risks in the Middle East creating supply fears and driving crude feedstock prices up. A breakdown in talks between Iran and the West will likely precipitate upside risks to our forecasts;

  • An OPEC decision to cut output will stop the expected downtrend in crude oil prices;

  • Contraction in emerging markets, thereby reducing the market for gasoline, poses significant downside risk to our outlook;

  • Faster than expected switch to alternative fuels in passenger vehicles will also pose downside risk to our forecast of gasoline prices, especially towards the tail-end of our forecast period from 2014 to 2018.

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Related sectors of this article: Oil & Gas, Refining/Marketing
Geography: Global
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