WAf gasoline imports from Europe continue at a steady pace, even surpassing import volumes seen in H1 2019 by 12%. The region is also looking toward the East of Suez market to supplement gasoline barrels as consumer demand in Asia declines and the Middle East increased gasoline exports by 10% in H1 2022 compared to the same period in 2019.

Diesel in the Atlantic Basin took an unexpected turn in June when the PADD 3 diesel arbitrage to Europe opened and raised flows to the region for two consecutive months despite rising prices and robust LatAm demand. Diesel is more resilient to increasing retail prices because it is largely used in commercial, industry, agriculture, and increasingly power generation sectors. 

Europe will increasingly rely on the US, the Middle East and parts of Asia to supply a growing volume of diesel, giving US refineries a strong incentive to maximize diesel yields in H2 2022 and beyond. We can already see evidence of this flexibility over the course of this year, as US distillate yields reached above 30% already multiple times. 

As we move past peak gasoline season and approach the autumnal turnaround season for US and European refineries, distillate stocks will draw and likely need to be replaced alongside alternative supplies for Russian diesel when European sanctions put a full stop to imports February 5, 2023, constituting a loss of about 750kbd to European markets.

How to clear the naphtha surplus?

US naphtha cracks may see some support from winter gasoline blending demand and lower global supplies due to the turnaround season. However structurally naphtha is expected to remain under pressure until the Asia petchem sector rebounds which looks even further away due to recession indicators. 

Using net flows as an indicator, declining imports net of exports provides a useful proxy of the net accumulation of naphtha. ARA naphtha net flows remain relatively elevated but have dropped for two months since peaking in May. European naphtha exports have increased for four consecutive months with strong indications for August showing continued flows heading to Asia and South America to clear the overhang. US naphtha exports have plummeted for three consecutive months since March, while Russian barrels have been on the rise since May with the largest volumes headed toward Europe.

LatAm clean product imports reach historical records in July 

As the rest of the world curtails expensive energy imports due to rising costs and recessionary fears, LatAm led by Mexico and to some extent Chile continue to pull in high volumes of transportation fuels due to a combination of deep-rooted policy of fuel subsidies in one form or another and unplanned refinery outages. 

Mexico’s transportation fuels imports are up 28% while Chilean imports doubled during May- July 2022 compared to the same period in 2019. Brazilian imports, LatAm’s second largest importer of refined products by volume, lag behind 2019 volumes. The large import program is good news for US refineries as they continue to run at high rates as LatAm happily digests 70% of these highly desired barrels from PADD 3.

While Mexico, the pillar of strength for LatAm imports, has shown few signs of slowing, troubling data is starting to appear. Mexico’s manufacturing PMI in July has fallen below 50 for the first time since Q1 2022 and it is thought that inflationary pressures are weighing on the supply chain pointing to a likely contraction in the near term. How much this will impact fuel imports is yet to be seen. If Mexico were to weaken, the overall picture could change drastically.

Outlook a function of four key factors

As global refining margins continue to slide and the petrochemical margins outlook remains hopeless, we will likely see refineries maneuver to minimize gasoline and jet production by shifting yields to diesel production only limited by reduced transportation fuel demand in Europe as high prices slow down the economy. 

The fate of diesel cracks looks to be set by the balance of four key factors: 

• The repercussions of recession, inflation and increasingly unprofitable industrial operations on demand
• The additional demand from the power generation sector due to gas, nuclear and renewables shortfalls
• The actual path of the Russia/Ukraine war and Europe’s implementation of the Russian diesel ban
• The ability of the global refining system to produce the required volumes, a function of overall runs and the extent of yield shifts (both dependent on margins and the skew in cracks)