Gasoline: Summer Boost To Be Tempered By Well-Supplied Market

Q114 affirmed growing weakness in the gasoline market as prices continue to fall. We maintain that 2014 and beyond will continue to see a downtrend in gasoline prices alongside a fall in crude oil prices. We have downwardly revised our forecast for gasoline for the rest of 2014 especially in Rotterdam and New York, as weak consumer demand and greater fuel efficiency continues to hit growth prospects in these countries. We are more optimistic about prospects for gasoline in the Singapore market, as private vehicle demand for gasoline in emerging economies in Asia continues to grow.

Weak Q114 For Gasoline

In Q114, gasoline traded at its lowest level in the corresponding period in four years. This is partly a reflection of the fall in sentiment surrounding political risk and bullish sentiments regarding Chinese economic growth, which has in turn hit crude oil feedstock prices. As shown in the chart below, crude oil prices also averaged at its lowest point in the corresponding period in Q114.

Tracking Crude
Corresponding Q1 Prices - Crude (LHC) & Gasoline (RHC), USD/bbl

Q114 affirmed growing weakness in the gasoline market as prices continue to fall. We maintain that 2014 and beyond will continue to see a downtrend in gasoline prices alongside a fall in crude oil prices. We have downwardly revised our forecast for gasoline for the rest of 2014 especially in Rotterdam and New York, as weak consumer demand and greater fuel efficiency continues to hit growth prospects in these countries. We are more optimistic about prospects for gasoline in the Singapore market, as private vehicle demand for gasoline in emerging economies in Asia continues to grow.

BMI Gasoline Price Forecast, 2012-2018
2012 2013 2014f 2015f 2016f 2017f 2018f
Crude Reference
Brent 111.70 108.79 104.96 102.00 101.00 99.00 98.00
WTI 93.30 98.01 100.66 101.00 96.00 94.00 95.00
Dubai 108.88 105.36 101.84 100.50 98.50 96.50 95.50
Gasoline
Rotterdam 121.28 115.19 111.38 110.34 107.67 104.34 103.07
New York 124.79 118.70 113.10 112.19 108.31 105.70 105.53
Singapore 123.47 115.89 113.97 112.03 108.87 105.84 105.77
Global 123.18 116.60 112.82 111.52 108.29 105.29 104.79
f=forecast. Source: Bloomberg, BMI

Weak Q114 For Gasoline

In Q114, gasoline traded at its lowest level in the corresponding period in four years. This is partly a reflection of the fall in sentiment surrounding political risk and bullish sentiments regarding Chinese economic growth, which has in turn hit crude oil feedstock prices. As shown in the chart below, crude oil prices also averaged at its lowest point in the corresponding period in Q114.

Tracking Crude
Corresponding Q1 Prices - Crude (LHC) & Gasoline (RHC), USD/bbl

The volatility of gasoline prices also saw a significant reduction in Q114 in the New York and Rotterdam markets, as crude oil prices traded sideways through much of the quarter. Prices also stayed relatively weak in part due to the cold snap in the US East Coast, limiting US demand for the consumer vehicle fuel. Meanwhile, gasoline prices in Singapore continue its streak of trading above that in the western markets, in line with growth in the consumer markets.

Less Volatility In Q114
Gasoline Prices - Rotterdam, New York, Singapore (USD/bbl)

Europe And The US: Competitive Market To Limit Summer Gains

We do not expect any drastic movements in crude oil prices through the rest of the year, unless supply-side issues, such as political risks in the Crimea and OPEC production cuts, see a rebound in prices ( see 'Brent Heading Lower, But Big Support At USD100/bbl', April 4). With crude oil prices expected to trade sideways through much of the year, we expect gasoline prices to generally follow crude price trends.

The summer driving season is set to send gasoline prices on an uptick in the US, which prices in Rotterdam will also follow given the importance of the US East Coast market to European refiners. However, we note that summer gains will be more limited than in previous years, owing 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 expected to be even weaker as the continent continues to prefer diesel-powered vehicles over gasoline.

Running Out Of Gas
Gasoline Consumption - US & Largest European Consumers ('000b/d)
  • 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.

Tight Market As US Output Remains High
Gasoline Production - US & Largest European Consumers ('000b/d)

Thereafter, the winding down of the driving season as winter approaches in Q414 will once again see gasoline prices soften in Rotterdam and New York, a trend which we also expect for Singapore.

Summer Boost
Gasoline Quarterly Price Forecast (USD/bbl)

Asia: Market Rebalancing To Better Support Market

Prices in Singapore will broadly follow crude oil price trends, though we expect prices to continue trading at a slight premium relative to Rotterdam and New York as consumption continues to rise. Continued domestic consumption growth in emerging economies will drive this trend.

  • Although we expect China's overall oil demand to see slower growth, we note that the re-orientation of Chinese economic growth from an investment-led to a consumption-led model will benefit consumer-dependent oil products such as gasoline - the fuel of choice for passenger vehicles. As the graph below shows, Chinese consumption will more than make up for the fall in Japanese gasoline demand.

Emerging Economies Push Gasoline Growth
Gasoline Consumption - Selected Asian Countries ('000b/d)
  • Continued growth in the middle class and private vehicle ownership in other Asian emerging countries, in particular India, Indonesia, Vietnam and Pakistan.

Gasoline Demand Growth Drivers
Passenger Car Fleet Of Selected Emerging Markets In Asia (units)

Nonetheless, we also acknowledge that part of this growth will be catered for by an increase in domestic gasoline production, especially in India and China. Moreover, the competitiveness of the Atlantic Basin is expected to drive some European production to Asia, which will in turn limit the price premium in Asia in 2014 and beyond.

Strictly Downward
Gasoline Price Forecast, 2012-2018 (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.

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Sector: Oil & Gas, Autos
Geography: Global
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