Asian oil refiners to see margins rise, but not for long

Asia’s refiners are likely to get some short-term relief on diesel and gasoline profits as exports dip from China, South Korea and India.
With seasonal demand peaks arriving in China and India and at least one South Korean refiner scaling back throughput because of the current weak cracks, the stars are aligning for improvement in margins.
But the increase is likely to be temporary as the drop in exports is driven by seasonal and inventory factors rather than any fundamental change in the market dynamics.
In fact, the market fundamentals appear to be shifting toward structurally lower margins for refining fuels in Asia, given the ongoing commissioning of new plants in China, India and the Middle East.
Nonetheless, a recovery in refining margins is likely this month and next, although probably not to the levels that prevailed as recently as February.
The profit margin for a complex refinery in Singapore rose $ 1.35 on Wednesday to $ 5.18 a barrel, but this is still less than half of the $ 10.49 average for February and a substantial discount to the $ 7.44 average for the past 12 months.
Much of the weakness in cracks has been concentrated in the major products of diesel and gasoline, and in both cases Chinese exports have been a major factor.
Exports of refined products from China increased marginally in April to 2.67 million tons from March’s 2.65 million, but they are up 29 percent in the first four months of the year from the same period in 2012.
While a breakdown of the product split in the April figures won’t be available for a couple of weeks, it seems reasonable to assume that the trends for the first quarter are likely to have been maintained.
In the first three months of the year China exported about 109,000 barrels per day (bpd) of gasoline, an increase of 122 percent from the same period in 2012. It exported 87,500 bpd of diesel over the period, a 370 percent leap from the 18,600 bpd a year ago.
Exports surged as Chinese refiners commissioned new units just as growth in domestic consumption was slowing, with March implied oil demand dropping to a seven-month low of 9.72 million bpd, up just 3 percent from the same month in 2012.
It may also be that refiners decided to export excess fuel supplies, with commercial fuel inventories dropping 1.8 percent in March.
Looking ahead, it’s likely that Chinese refiners may export slightly less in coming months as they rebuild stockpiles ahead of the summer peak demand season.
A 4-5 percent cut in gasoline and diesel retail prices in China on April 25, the second price reduction in a month, may also boost demand, as will the ongoing modest recovery in economic growth.
Finally, the lower margins in Asia for gasoline and diesel will also discourage Chinese refiners from exporting, and in the past they have shown they are more likely to reduce operating rates than export at lower prices.
The profit margin on a barrel of diesel in Singapore over Dubai crude was $ 15.33 on Wednesday, up from the year-low of $ 13.86 reached on April 30, but still well below the peak of $ 21.86 touched on Feb. 19.
For gasoline, the crack GL92-SIN-CRK slipped to $ 5.55 a barrel on Wednesday, above the year-low of $ 4.35 hit on April 11 but only about one-third of the Feb. 15 peak of $ 15.73.
Weak margins are behind reported moves by South Korea’s GS Caltex to cut refinery run rates to 93 to 94 percent in May from 95 percent in April.
Similarly, Japanese refiners JX Nippon Oil & Energy Corp, Idemitsu Kosan and Showa Shell Kikiyu also plan to reduce operating rates in May, partly due to maintenance but also because of weak margins.
In India, which has turned to a diesel exporter having not imported since August last year, the onset of summer weather is expected to boost demand for power generation.
It’s likely that the South Asian nation will ship fewer cargoes in May and June, but thereafter seasonal demand tapers, which will allow Indian refiners to export surplus fuel again.
India exported about 500,000 bpd of diesel in April, so any reduction will serve to tighten Asian supplies.
That’s the good news for refiners, but the bad news is that the diesel crack has likely shifted structurally closer to the $ 15 a barrel that is averaging so far this year, down from levels closer to $ 20 over the past two years.
— Clyde Russell is a Reuters market analyst. The views expressed are his own.