Asian refining margins drop to three-year low

LAUNCESTON, Australia: Asian refining margins have dropped to the lowest in three years and while
profits are likely to get the traditional year-end boost from winter demand, it may not be as large as in the past.
The processing profit on a barrel of Dubai crude for a complex refinery receiving Singapore benchmark product prices fell to $3.53 a barrel over the past five days, down from the peak this year of $10.49 reached in February.
Using the monthly average figures, margins are at their lowest since September 2009 as refiners battle a combination of high crude oil prices, softer economic growth in parts of Asia and increasing supply from plants in China and the Middle East.
Relief normally comes in the form of the traditional boost to demand for fuel during the northern hemisphere winter.
Last winter, margins rose 93 percent from November 2012 to February this year, while for the prior year the gain was 91 percent.
A similar gain this year would take margins to close to $7 a barrel, still below the peak reached at the end of winter earlier this year, but certainly enough to keep refineries in operation.
However, there are several factors that suggest that margins may not recover as much as refiners no doubt hope they will.
Chief among these is the increasing supply of products likely to hit the Asian market.
Saudi Arabia’s new 400,000 barrel per day (bpd) Jubail refinery, a joint venture between Saudi Aramco and France’s Total has started production and will ramp up to full capacity by the end of the year.
While much of the export output of this plant is more likely to flow to Europe than to Asia, it will displace Asian cargoes that used to head west of Suez and now will have to be sold in the east of Suez market.
Adding to the potential supply of oil products in Asia are new refineries being commissioned in China, including PetroChina’s 200,000 bpd plant in Sichuan and Sinochem’s 240,000 bpd Quanzhou complex.
While it’s by no means certain that extra Chinese capacity will find its way into export markets, this has so far been the case in 2013.
In the first seven months of the year China was a net exporter of about 50,000 bpd of diesel, compared with being a net importer of 17,400 bpd over the same period in 2012.
China’s refineries are also running at relatively low operating rates, with 9.36 million bpd processed in August, and an average of 9.53 million bpd over the first eight months, compared with a capacity of 12 million bpd.
Additional capacity increases the possibility of higher runs, and if domestic demand isn’t growing fast enough, as currently appears the case, China’s refiners will be looking to export.
There is also the chance of softer winter demand, with weather forecasts so far suggesting a normal season.
However, Japan is likely to use less fuel oil for power generation as cheaper coal-fired power increases, with the Petroleum Association of Japan estimating demand for direct-burn crude and fuel oil may drop 10 to 20 percent this winter from the prior year.
Traders also say it appears that major diesel imports such as Vietnam and Indonesia have largely obtained what they need for the fourth quarter, and demand in Australia, may be lower given reduced consumption at remote mines as a result of low prices for some minerals, especially coal.
On the positive side, gasoil stocks in both Europe and the United States are currently below the levels for this time last year, implying the US may export less to Europe in the next few weeks, while demand for cargoes from Asia may rise.
Whether this will be enough to boost, or even maintain, gasoil margins in Asia is doubtful. It will likely take higher demand in the region to cause the crack to rise.
The gasoil crack has been drifting lower in recent weeks, dropping to $16.14 on Thursday from $19.67 a barrel on July 22.
While a seasonal boost is still likely, Asian refiners will be hoping that other factors also kick in, such as lower crude oil prices if tensions ease around the Syrian conflict, stronger economic growth and a colder than expected winter.