It's an old sporting adage and one that in England is often ascribed to the legendary football manager, Brian Clough. Ahead of a key soccer match, an interviewer posed the question of whether Clough could expect to win a game when, on paper, his team was clearly outclassed.
Clough, never short of a Churchillian response, coolly observed; "The game's not played on paper, young man. It's played on grass."
Anyone associated with European middle distillate markets at the moment -- actually, scratch out that parochial lapse -- anyone associated with middle distillate markets anywhere, has had a nagging feeling lately that the game is, for the moment at least, very much being played on paper.
How else to account for eye-poppingly epic stock counts that continue to surpass previous benchmarks? How else to explain the gasoil crack remaining resolutely positive, despite stockpiles mounting and green shoots looking only patchy amongst wilting economies?
Compared with 2008, when gasoline cracks suffered horribly and turned negative as gasoline was cranked out as a by-product to diesel demand, the presence of a positive crack has looked anomalous to some.
Despite diesel now looking like the by-product, the crack has held around plus $7/b, with jet and gasoil hovering around $1.50/b either side of that level.
Contango is the one word answer -- the catcher's mitt, to prolong the sporting analogies, that ensures every product has both a home and demand even when end users aren't burning it.
But contango homes simply offer deferred demand -- sooner or later the product has to come out, and how and when it does that remains the big question that overshadows the market.
With that in mind, traders have been looking to two very physical factors that, they hope, will begin siphoning off some of the overhang. First, the onset of a very, very cold winter between 2009 and 2010, and secondly the imminent arrival of maintenance season.
As far as the former option goes, long range weather forecasts so far offer few prospects for those pinning their hopes on a repeat of last year's prolonged European cold spell.
Which leaves the second option -- maintenance.
With the summer bringing vacations and winter offering inclement weather, North West Europe in particular has settled neatly into a two-pronged maintenance season: one in early spring and the other in mid-fall. Both are eagerly anticipated by market participants.
"[Vacation time] is backwardated. Q4 is coming," one Geneva-based trader quipped in late August. "We'll probably get a repeat of last April. Everybody screaming 'turnaround', the market soars ... and then, splat."
Estimates so far put the amount of North West European capacity that will be affected through October at around 1 million b/d, with rumors swirling around both the twin peaks of European refining; Shell's 406,000 b/d Pernis refinery, Europe's largest, and BP's 400,000 b/d Rotterdam refinery.
Along side that, Total has recently signaled its willingness to take more dramatic action, shutting its 140,000 b/d Dunkirk refinery--all grist to the mill as players hope the distillate supply is choked off.
However, the anticipation of maintenance this season leans more toward hope than expectation -- wholly tempered as it is by the knowledge that, somewhere in European waters, there lurks millions of tons of distillates awaiting their moment.
"It will take something to chew through these stocks," a second trader said, but the sobering estimate put forward by a third trader is that refineries across the region could actually shut down for upward of a month before the backlog is cleared.
And what of the rest of the world? With the US and Asia still swimming in gasoil, the fear is that subdued European demand almost renders Europe's refining base redundant anyway--there remain plenty of other sources open to Europe, even with maintenance affecting other regions of the world.
So, turnarounds ain't what they used to be. And, although unlikely to make for much of a playing surface, maintenance does at least go beyond the paper and provide a physical stop to some of the distillate flows.
Until the green shoots can thicken into substantial growth, that may have to do.
Nice blog, Tim. Recent Asian economic wouldn't support the view that Asia is swimming in gasoil, though. For one reason or another, the Front Month/Second Month contango has narrowed from minus $1/barrel on August 3 to minus 38 cents/barrel on September 8 -- not enough to cover storage costs, for sure. Meanwhile the Singapore swap/Gasoil EFS has come in from minus $11.38/barrel to plus $1.17/barrel over the same time frame. So for some reason, the pressure of supply overhang seems to be off the Asian markets relative to the West, and any arb for Europe's autumn shoulder season would be impossible to finance at prevailing derivatives rates.