Global refiners to deepen oil output cuts as demand slumps

The Essar Oil refinery in Vadinar, in the western state of Gujarat, India. (REUTERS/File Photo)
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Updated 27 March 2020

Global refiners to deepen oil output cuts as demand slumps

  • Refining system grapples with ‘unprecedented shock’ in wake of coronavirus lockdowns and travel curbs

SINGAPORE: Oil refiners from Texas to Thailand are bracing for deeper output cuts, bruised by an unprecedented demand shock as more countries lock down and restrict travel to contain the spread of the coronavirus.

In Asia, home to over a third of the global refining capacity, India’s top refiner has slashed output by up to 25-30 percent, while operators in Japan, South Korea and Thailand — already running at reduced rates — are looking at more cuts even as they shut plants for maintenance.

Several refineries in Europe and the US have also cut output in the past week.

China, which restarted its economy after weeks of lockdown, is an outlier with its refining sector showing signs of recovery amid a decline in the number of new virus cases.

Global oil demand, however, will likely slump by 18.7 million barrels per day (bpd) in April, versus a 10.5 million bpd drop in March, Goldman Sachs analysts said. Total annual consumption will drop 4.25 million bpd from 2019 levels, they added. “Such a collapse in demand will be an unprecedented shock for the global refining system,” the analysts said.

Asia accounts for more than 60 percent of world oil demand growth.

The pandemic has roiled financial markets, with oil crashing by about 60 percent so far this year — on track for its biggest quarterly loss ever.

Refiners in Asia are now losing money as domestic demand has dried up with people staying at home and bleak margins making exports not lucrative either.

A complex refinery in Singapore stands to lose nearly $2 for every barrel of crude it processes, including losses of more than $6 a barrel on gasoline production. 

To make matters worse, some refiners have been unable to use the downtime for maintenance purposes due to manpower shortage amid travel curbs.

“This first quarter would be the worst first quarter we have ever seen as producing oil products was loss-making,” said Cho Sang-bum, an official at the Korea Petroleum Association.

South Korea run rates fell to 82.8 percent in February, lowest for the month since 2014, and more cuts will come as gasoline and diesel demand are expected to fall 30 percent on year in March, sources and data from the Korea National Oil Corp. show. 

Japan too is mulling more cuts after run rates fell nearly 7 percent for the first 12 weeks in 2020, data from the Petroleum Association of Japan show.

Japan’s top refiner JXTG expects a record net loss of 300 billion yen ($2.73 billion) for the year ending March, while Hyundai Oilbank is planning to cut expenses by up to 70 percent to help offset the impact of the slump in margins.

In India, refiners are facing a tough cash flow situation, an official at one of the state refiners said.

Their tanks are full, but their retail income has virtually stopped due to weak demand while they continue to make payments for crude imports to avoid default, the official added.

In contrast, China, the world’s No. 2 refining center, is expected to see its average run rate rise 3 percent on year to 77 percent in the second quarter, from 63 percent in February, said Seng Yick Tee, analyst at Beijing-based consultancy SIA Energy.

Mega-refineries are optimising run rates for petrochemical feedstock, while low oil prices, stimulus measures and a rush to replenish stocks for manufactured parts as businesses come back online are spurring demand in China, the analyst added.

Australia’s four refiners said they were watching the situation and would adjust runs. Two warned that local jet fuel demand was likely to collapse by up to 90 percent over the time that flight cancelations are in place.

Petron Corp. and Shell in the Philippines, Indonesia’s Pertamina and PetroVietnam said that their refineries were operating normally. 


S&P cuts Australia’s sovereign outlook, affirms AAA rating

Updated 08 April 2020

S&P cuts Australia’s sovereign outlook, affirms AAA rating

  • S&P affirmed Australia’s prized rating but said a downgrade was possible within the next two years
  • Australian long-dated bonds sold off after S&P’s outlook downgrade

SYDNEY: Global ratings agency S&P on Wednesday lowered its outlook on Australia’s coveted ‘AAA’ rating to “negative” from “stable” in anticipation of a “material” weakening in the government’s debt position as it splashes out a large fiscal stimulus package.
S&P affirmed Australia’s prized rating but said a downgrade was possible within the next two years if the economic damage from the COVID-19 outbreak is more severe or prolonged than it currently expects.
Australia is among a handful of countries in the world to boast the best ranking from all three major ratings agencies.
But it has come under a cloud as the pandemic has dealt Australia a severe economic and fiscal shock, with S&P predicting the A$2 trillion ($1.23 trillion) economy would plunge into recession for the first time in nearly 30 years.
This would cause a “substantial deterioration of the government’s fiscal headroom at the ‘AAA’ rating level,” S&P said in a statement.
Treasurer Josh Frydenberg said the outlook downgrade was “a reminder of the importance of maintaining our commitment to medium term fiscal sustainability.”
The government has pledged A$320 billion ($197.73 billion) in fiscal spending, or 16.4 percent of annual economic output, to backstop the economy and prevent a crisis as the pandemic shuts companies and leaves many unemployed.
Some fund managers said Wednesday’s outlook downgrade was unlikely to raise the government’s borrowing costs by much though it could hurt Australian companies whose ratings are dependent on the sovereign rating.
“A large proportion of credit funds are mandated to maintain funds in a specific ratings bucket,” said Asmita Kulkarni, Director Investment Strategy at FIIG.
“With potential widespread downgrades we could see funds being forced to sell-down investment which would result in a widening of credit spreads.”
Australian long-dated bonds sold off after S&P’s outlook downgrade with 10-year yields jumping to 0.967 percent from 0.909 percent at Tuesday’s close.
Economists said they do not expect a rating downgrade prior to the federal budget due on Oct. 6.
It was only in September 2018 that S&P upgraded Australia’s outlook to “stable” from “negative” as the budget came close to balance. The government had even projected a surplus for the current fiscal year and next.
While all those predictions are now under water, Australia’s public debt is still in good shape, S&P noted.
“While fiscal stimulus measures will soften the blow presented by the COVID-19 outbreak and weigh heavily on public finances in the immediate future, they won’t structurally weaken Australia’s fiscal position,” S&P said.
“This expected improvement is a key supporting factor of our ‘AAA’ rating.”