New hope or false dawn? Asian refining margins gain, but risks loom

LAUNCESTON (AUSTRALIA): A recent strengthening in refinery margins in Asia is leading to a sense that the worst may be over for the embattled sector as more nations in the region start to emerge from coronavirus lockdowns.

But the main risk now for both the crude oil and refined products industries is that the renewed optimism leads them to boost output to levels above the nascent recovery in demand.

The profit margins, or cracks, for producing both gasoline and gasoil, the building block of diesel and jet kerosene, have bounced off record lows in recent sessions, as traders report tentative signs of a recovery in demand and more interest in securing cargoes.

The crack for making a barrel of gasoline from Brent crude in Singapore rose to a loss of 24 US cents a barrel on Monday, the highest in two months and up from the low of a loss of US$13.15 on April 14.

The profit on producing a barrel of gasoil with 10 parts per million sulphur lifted to

US$4.37 a barrel on Monday, up 147% from the low of US$1.77 on May 5.

However, both refined products are still well below their highs so far in 2020.

Gasoline is still loss-making, compared with a high of a profit of US$9.35 a barrel on Feb. 11, and the gasoil crack is some 73% below its high of US$16.15 from Jan 3.

The improvements in cracks in recent days have lifted refinery margins close to breakeven, with a typical complex refinery in Singapore processing Dubai crude making a loss of just six US cents a barrel, based on the prices of the underlying crude and products on Monday.

With the large discounts to benchmarks like Dubai crude being offered by major exporters such as Saudi Arabia, it’s likely that many of Asia’s refiners are able to make a profit from processing at current prices.

This in turn may encourage them to ramp up operations, which were severely curtailed in April as the new coronavirus led to lockdowns across Asia, including major economies such as India, Japan and Australia.

As much as four million barrels per day (bpd) of refining capacity in Asia was idled in April, according to estimates by analysts, and as much as 2.7 million bpd may be offline during the second quarter as a whole.

While fuel demand is starting to recover as lockdowns are eased in Asia, the China experience may give some cause for caution.

The world’s second-biggest economy was the first to impose lockdowns, and the first to lift them as it contained the coronavirus, which was first detected in the city of Wuhan in December.

Consultants Eurasia group said in a May 11 note that while China’s road fuel demand is up from its low of 4.5 million bpd, it’s not expected to increase much above five million bpd for the rest of the year, which is well below 2019’s 5.3 million bpd.

Asian refiners will have to be cautious about measuring the actual increase in demand and tailoring output to match, while at the same time dealing with the likelihood of higher product exports from China.

Asia’s largest crude importer and refiner exported eight million tonnes of refined fuels in April, according to customs data.

This was an increase of 10.2% from March, and for the first four months of 2020, exports were 15.1% higher at 26.01 million tonnes, equivalent to about 1.72 million bpd.

China has issued a second batch of fuel export quotas to domestic refiners, allowing for 28 million tonnes of shipments, mainly for gasoline, diesel and jet kerosene, Reuters reported on May 11, citing four sources.

This follows the first 2020 quota allowance of 27.99 million tonnes and means Chinese refiners will have the ability to keep product exports at the current high levels, a move that in turn is likely to exert downward pressure on refinery margins.

Add in likely restarts and ramping up of output at India’s export-orientated refineries and it appears likely that the risk to Asia’s refining sector is one of renewed oversupply.

The opinions expressed here are those of the author.