Asia Q2 oil products outlook and factors to watch

Market for Asian oil products has just entered the second quarter amid signs of some recovery in gasoline demand and tightness in naphtha supply, while the outlook for jet/kerosene appears bearish. The following are some factors that traders said might influence various oil products in Asia in the April-june quarter.

Gasoline

Asian gasoline market could see recovery in demand on increased buying for the summer season and potentially lower availability due to planned refinery maintenance. The market in Q1 saw ample supplies from refiners, as well as the inflow of arbitrage cargoes from the West, resulting in a lower crack spread.

The Singapore 92 RON gasoline crack spread against front-month ICE Brent crude futures averaged $7.92 per barrel over Januarymarch, compared to $10.52 in the same period last year.

The market could recover starting April, as volumes offered by Chinese refiners would likely ease in Q2. The implementation of a consumption tax in China on imported mixed aromatics from May 1 would create a void in the gasoline pool, which would likely be filled by domestic gasoline supplies. This would lead to a lower level of gasoline exports. Maintenance activity will continue as a number of refineries in China, India, Japan and Taiwan are slated to shut for turnarounds. On the demand side, most market participants are hopeful about a pick-up in demand as the winter season has ended.

The recent drawdown in US gasoline stocks and the onset of the summer driving season would also boost market sentiment.

In addition, demand from Indonesia is expected to be robust, with state-owned Pertamina planning to import around 9 mbd in April — up from an average of 8.7 mbd over January-march — as the country prepares to stock up ahead of the Muslim holy month of Ramadan.

Naphtha

Supply tightness in the Asian naphtha market is expected to spill over to the first half of Q2, which could support market fundamentals.

Supplies from India appear to be dropping. S&P Global Platts tanker data tracked around 1.17 million tonsof March-loading naphtha for shipment along the India-east Asia shipping route, compared with 1.495 million tons for February loading — a drop of 21.7 percent.

Arbitrage naphtha supplies from Europe, the US and other regions for April arrivals into East Asia are projected at around 1.3 million-1.4 million tons.

The East/west spread, which measures the premium of CFR Japan naphtha cargo swaps over the CIF NWE naphtha cargo swaps, is still narrow, discouraging suppliers in Europe to move naphtha to the East.

Petrochemical cracking margins for the widely-watched olefins, such as CFR Northeast Asia ethylene versus CFR Japan naphtha physical, rebounded to above $700 per ton levels in early March. It fell to $654.50 per ton — the lowest level in seven months — towards the end of February. A few naphtha-fed steam cracker units in Northeast Asia are expected to return from turnarounds by end-april.

LPG

LPG is expected to remain a preferred alternate feedstock for North Asian petrochemical makers in Q2, as the discount of propane and butane to naphtha is set to remain steep.

The end of winter, which reduces LPG demand for heating in China and South Korea, is expected to weaken LPG prices further. With supplies at comfortable levels, the regional LPG market is expected to increasingly look to the petrochemical sector to soak up propane and butane cargoes. A weaker Asian market compared with US Mont Belvieu prices have led to some cancellation of US cargoes for loading in March and due for arrival in Asia in April. Asia is expected to be well-supplied by cargoes from Iran, which has restored normal export volumes since December.

Other Middle Eastern producers, such as Saudi Arabia and Qatar have also been recently offering and selling spot cargoes for March. Some Saudi offers were due to shutdowns at petrochemical plants. The market will be watching if such spot offers — which had been scarce for most of last year — will continue to be made in Q2.

These offers come at a time when demand for spot cargoes remain weak in Japan, while some demand for spot cargoes is expected to be seen from the household sectors in China and Indonesia.

Diesel

The outlook for diesel in Q2 looks like a mixed bag. While a slowdown in exports from India and the seasonal maintenance should provide some support, premiums are likely to be capped by exports from China and a closed arbitrage to the West.

In India, Reliance Industries started maintenance from mid-march, while volumes offered from Essar Oil have been relatively lower. In addition, domestic demand has been robust in India. Market participants expect India to export even lower volumes in coming months or even import some cargoes.

Refinery turnarounds in South Korea, India, Taiwan, Japan and Malaysia have also capped supply. There is also uncertainty surrounding the allocation of the second round of oil product export quotas by China. This has affected plans of diesel exporters.

In addition, the annual fishing ban in Q2 is expected to reduce demand for medium sulfur diesel in China. Traders are expecting the availability of 10 ppm diesel cargoes to be higher in Q2, compared with Q1, which could affect premiums. Fundamentals have also diverged between the middle sulfur grade and ultra-low sulfur diesel — while 500 ppm sulfur diesel has found support from steady demand, 10 ppm sulfur diesel has struggled to find buyers in the region.

Lackluster demand for ULSD and a closed East-west arbitrage to move ULSD cargoes drove cash differentials for the grade to a yearto-date low of minus 6 cents/b on March 5 — the lowest since Platts moved the benchmark to 10 ppm sulfur diesel from 500 ppm sulfur diesel on January 1. The front-month diesel Exchange of Futures for Swaps remained mostly in negative single-digit territory through Q1.

This article originally appeared on platts.com.