2024 Market Outlook

As 2023 draws to a close, our resident commodity owners, Philip Jones Lux (gasoline), James Noel Beswick (distillates) and Jorge Molinero (naphtha) take a look back at what we have learned in 2023, and what we can expect from 2024.

GASOLINE

What we learned in 2023 

Looking back to the start of 2023, full Russian sanctions were expected to dominate the market for the year ahead, with trade flows upended and premiums added across almost all markets.

In reality, whilst there were certainly some prolonged teething pains in Q2, the vast majority of the impact died down quite quickly as the global oil market showed its typical ability to reorganise itself and carry on as close to business as usual as possible.  

This is a lesson that we should now be reminding ourselves of in the face of – almost certainly overhyped but still deadly serious – current disruptions and threats of further diversions in the Red Sea.

An oil market which is largely unimpressed by OPEC’s latest offerings has been drifting away from the steep backwardation characteristic of the last couple of years, allowing flows around the Cape of Good Hope to suffer lower penalties than they would have earlier in the year. And besides, the chances remain high that significant action will be taken soon enough to ensure that actual volumetric shifts in trade flows remain minimal.  

In gasoline specifically, as expected, the importance of the AG as a blending and resupply hub has grown further, and further capacity expansions in the region are only set to perpetuate this going forward.

The Singapore market has proven remarkably robust through much of 2023 despite strong competition into swing importers, and lower outright prices forecast should further help to keep demand momentum strong and with it underpin the strength in Sing 92 cracks and spreads.  

What can we expect in 2024 Q1 

In the Atlantic Basin, despite a generally well-supported year for gasoline cracks and a chance for European exports to dominate much of Latin America through the summer months, the winter has certainly kicked in over the last few weeks and – albeit at a higher baseline than in previous years – cracks and spreads have settled into a little winter slumber. 

The headlines for the start of 2024, however, suggest that this is not the moment to take an eye off of the Atlantic Basin gasoline market as it runs through its typical Q1 inventory building phase. The impact of a frontloaded and relatively heavy US turnaround season planned, as well as major outages in the Middle East, is likely to be twofold. 

Firstly, whilst PADD-3 inventories have been stubbornly high in recent months, their trajectory out towards the end of Q1 will be pivotal to set the baseline for how much of a seasonal uptick we can expect come Q2.

Another month or so of aggressive pricing to export – now helped by freight rates and availability returning to workable levels as the Panama Canal congestion clears – and a solid chunk of maintenance could well underpin the US gasoline market if inventory growth is kept in check.  

Secondly, European exporters look set to be handed something of a lifeline (Red Sea disruption aside) by reduced Q1 AG supply. It is a lifeline that they are likely to need, with Dangote edging ever closer to becoming operational and cutting off a reliable dumping ground for ARA-blended barrels.

As such, whilst EBOB should receive some support from reduced supply in competitor markets earlier in Q1-24, the latter part of the quarter and into Q2 look set to finally see TA Arb spreads widening back out significantly as ARA is forced once more to compete for export opportunities amidst a market well increasingly well-supplied again for the first time since before the pandemic. 

Distillate

What we learned in 2023 

Throughout 2023, Atlantic Basin diesel demand witnessed a substantial decline, notably impacting OECD European markets. By Q3 2023, demand reached a six-year low due to persistent economic challenges within the region. 

The imposition of Russian sanctions created a dual impact on the global gasoil market. Firstly, it led to a notable decrease in supply in regions adhering to the sanctions, particularly evident in Europe and the US.

Secondly, the absence of Russian crude resulted in lighter crude slates within these regions, leading to decreased gasoil/diesel yields. 

A significant trend in 2023 was the return of Asian, including Chinese, passenger numbers to or close to pre-COVID levels. Notably, in January, Singapore’s regrade moved back toward historic highs, following the resurgence of these travel activities. 

What can we expect in 2024 Q1 

Q1 2024 will witness the operational launch of the Al-Zour and Duqm facilities in the Middle East. With Asian diesel demand, led by Australia and SE Asia, expected to only grow by 40-50 kb/d in 2024, these facilities will be primed to predominantly target Western markets. 

However, as my colleagues allude to earlier in this piece, Middle Eastern Q1/Spring maintenance is set to be towards the higher end of its seasonal ranges and as such we should expect somewhat reduced flow to Europe and the Atlantic Basin in general. 

We anticipate a sustained escalation in Russian gasoil/diesel exports, maintaining their trajectory primarily towards Latam and Africa. 

Rumours indicate that the Q1/Q2 2024 maintenance schedules in the US and EU will likely surpass normal levels. This increase is attributed, in many cases, to the deliberate postponement of maintenance work in these regions, to capitalize on the lucrative product cracks experienced throughout 2023. 

Although diesel demand faced a substantial downturn in OECD European markets during 2023, a gradual recovery is anticipated in 2024 as these economies exhibit initial signs of recuperation. 

Consequently, the recent surge in global cracks, especially in HO cracks, is expected to persist through Q1. 

NAPHTHA

What we learned in 2023 
 
The major event of the year was undoubtedly the imposition of sanctions on Russia, impacting the naphtha market in two significant ways.

Firstly, the largest exporter to Europe was excluded from the Western market and some big importers in Asia followed the same path during the year. Russian flow was redirected to the Middle East, India, and those Asian countries that did not impose sanctions or price caps.

The immediate effect was seen in pricing, Europe and the E/W followed the decline that began at the end of 2022, sinking to historic lows until mid-Q2. The arbitrage to Asia closed completely, and it seemed challenging for Europe to replenish Russian products throughout the year, the exporters were supposed to become importers and had to be reflected on the pricing. 

On the other hand, the absence of Russian crude was substituted by lighter crude in Western refineries, leading to a higher yield of light naphtha and causing shortages in the aromatic components of blending. This situation drove the crack to historic lows in parts of the year, reaching the lowest levels in the past 9 years, while Gas-Nap soared to its peaks. 

From April and May onwards, the trend shifted, and while the dynamics of Gas-Nap and blending quality premiums still retain some strength, the weakened state of the petrochemical industry in Europe has led to a return to a market more akin to previous years.

Europe does not miss Russian products, and we will start the year as we ended it, with Asia exerting pressure to import more cargoes from the West. 

What can we expect in 2024 Q1 

For the beginning of next year, we anticipate that the trend seen in December will persist. MOPJ will need to continue exerting upward pressure to attract products, mainly from Europe, and, if Panama demurrages allow, potentially from the U.S. Europe will continue to feel this upward pressure on spreads and cracks.

The geopolitical risk in the Red Sea will also influence the dynamics of the arbitrage from the West; higher tensions will exert more pressure on freight, and a higher TC15 will result in increases in the E/W.

However, we have already seen a correction in these levels, and we may not return to values as high. Nevertheless, expected shutdowns in the Middle East will likely maintain higher values than those seen during the past year for spreads, cracks, and MOPJ. 

Finally, Gas-Nap is poised to stay wide, and in Europe, demand could rise with the reduction of Middle Eastern products, strengthening European naphtha, particularly in the LVN and heavy premiums. 

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