(BLOOMBERG) – Asian refineries are grappling with what is expected to be a brief period of weak profits as a demand-sapping Covid-19 comeback across the region coincides with a likely surge in oil product exports from Iran.
The virus resurgence in India and other nations apart from China is reducing consumption of products such as petrol and jet fuel, squeezing the profit margins of refiners. The market is also bracing itself for the possibility of a boost to Iranian fuel oil supplies into Asia should a nuclear deal be revived.
That has led to complex refining margins in Singapore, a proxy for Asia, falling from US$1.65 a barrel at the end of April to as low as 3 US cents in mid-May. While it is a setback for processors recovering from the pandemic, margins have rebounded slightly and are expected to resume an upward trajectory as soon as the third quarter with accelerating vaccination rates aiding demand.
The average profit from converting crude into gasoline in Asia – the so-called crack spread – fell last month from April, snapping a three-month gain. Across the region, restrictions in place from Malaysia, Vietnam to Japan sapped demand for transportation fuel, with oil consultancy FGE seeing India’s gasoline consumption as the “biggest stumbling block to Asia’s demand recovery” with an estimated 20 per cent fall in April through this month versus the previous quarter.
“Export is not a very attractive option,” said Mr N. Vijayagopal, the finance director at Bharat Petroleum, India’s second biggest fuel retailer. Refiners across the country are facing a double whammy caused by weaker regional markets and lower domestic consumption that is prompting them to set aside earlier plans to maintain run rates and reduce operations instead.
Complex refining margins in Singapore were at 80 US cents a barrel on Friday and averaged 71 US cents last month. That compares with US$2.41 in the same period in 2019, prior to the pandemic. The profit from converting crude to gasoline in Asia was at US$7.89 on Monday and averaged US$8.47 last month.
Most are expecting a flood of crude should the nuclear accord be renewed with Iran, but it is the prospect of rising fuel oil flows – used to power ships and for electricity generation in some countries – that has raised concerns for Asian refiners, especially as China boosts output of heavy fuel.
Margins for very low-sulfur fuel oil dropped below US$10 a barrel in mid-May for the first time since December, easing from a high of almost US$16 at the end of February. Cracks in May were also at the lowest average in five months. Margins for high-sulfur fuel oil fell as low as minus US$8.80 last month, from minus US$3.71 in April.
Diesel demand, most notably from China, is proving to be the bright spot and has provided a buffer for overall margins. Consumption in Asia during the first three months of the year was at 9.4 million barrels a day, or about 98 per cent of 2019 levels, and is expected to edge higher during the second quarter, according to Wood Mackenzie consultant Yuwei Pei.
Singapore’s stockpiles of middle distillates – a category that includes diesel – fell through the week ended May 26 to the lowest since April last year. Covid-19 restrictions and the return of refineries after seasonal maintenance may lead to rising Asian inventories, but regional diesel cracks could increase US$3 to US$4 a barrel to as much as US$10 by December, according to Wood Mackenzie.
FGE senior oil market analyst Grayson Lim said: “As the Covid-19 situation in Asia stabilises and restrictions are eased, improvement in cracks of transportation fuels should support both simple and complex refining margins through the third quarter.”