Singapore. Rallying oil refining margins have ground to a halt in Asia. Currently at a 2015 low, they could drop another 20-30 percent this quarter, led by declining profits in diesel as supply from the Middle East adds to a global glut.
While softer Asian demand for diesel will be a drag, margins will likely draw some support and stay above last year’s low as the region’s gasoline uptake remains healthy.
Asian refining margins enjoyed a stellar run in the first half of this year on weak oil prices and hit a two-year top above $10 per barrel in June. But they have almost halved this week to $5.60 with supply of refined products from traditional importers in the Middle East building up.
“We see refining margins weakening on worsening diesel fundamentals, particularly east of Suez, though gasoline should be supportive,” said Robert Campbell, head of oil products research at Energy Aspects.
Energy Aspects estimates a near 20 percent drop in third-quarter Asian crude refining margins versus April-to-June levels, while consultancy FGE sees a 30 percent drop.
This could force refiners to cut production to avoid eroding their margins further in an already well-supplied market. Middle Eastern producers have added at least 1.2 million barrels-per-day (bpd) of capacity over the past two years.
New refineries are typically configured to produce about 30 to 50 percent of middle distillates, comprising diesel and jet fuel, which has led to a glut of these products.
In fact, global diesel inventories rose by more than 25 million barrels in April from a year ago and are expected to continue growing this year, Standard Chartered said in a report.
This comes at a time when demand at one of Asia’s largest diesel consumers, China, is slowing down.
As a result, “a lot of diesel will be trapped in the Far East and this will lead to run cuts in places like Japan and South Korea as the arbitrage to the west will be closed by growing Middle Eastern supplies”, said Campbell.
Gasoline: A bright spot
Demand for gasoline, and crude prices that are more than 40 percent below last year’s high, should help keep a floor under Asian margins.
Gasoline demand is expected to see a double-digit growth in Thailand, the Philippines, Vietnam, Pakistan and India, according to Energy Aspects. This should help keep third-quarter refining margins above a low of $2.47 plumbed in August 2014.
Naphtha margins are also expected to stay firm as the product is blended into gasoline.
But Campbell cautioned that while gasoline demand will continue to be firm, it would be “hard for gasoline to go much higher without some significant refinery outages”.
Chinese refiners have been maximizing gasoline output to meet strong demand. Refineries returning from maintenance in China and South Korea will further add to the surplus.
“Run cuts will be needed to balance things, particularly if there is a warm start to the winter,” said Campbell.