Analysis: Asian distillate refining margins receive boost from plant issues
A recent slew of issues at refineries around the globe has provided a much-needed boost to Asian refining margins in July, improving overall regional fundamentals and opening arbitrage opportunities.
The gasoline market, which has been grappling with a supply overhang since May, has seen an uptick in demand for prompt cargoes in July on news of run cuts at the 200,000 b/d Nghi Son refinery in Vietnam and the delayed restart of Petron’s 180,000 b/d Bataan plant in the Philippines, sources told S&P Global Platts.
An estimated 670,000 barrels of additional gasoline demand has emerged as a result of these issues, according to open tenders seen by Platts.
In addition, a series of refinery outages on the US Atlantic and Gulf coasts have provided a significant boost to US NYMEX RBOB futures. As a result, the FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude futures surged to a multi-month high of $8.86/b at the Asian close Friday, mirroring the increase in US RBOB/Brent cracks — which have averaged $16.32/b to date in July, up sharply from the $11.76/b averaged in June.
“I think this high gasoline crack level can be sustained for a while; it really depends on how long the support from the US is going to last,” one trader said.
The issues on the US Atlantic and Gulf coasts have also benefited the Asian naphtha market, as an uptick in activity on the open Europe-US arbitrage route has prompted European gasoline blenders to seek more of the blendstock.
As a result, several naphtha cargoes were heard to have been consumed within the region rather than sent East, lending a mild reprieve to Asia’s persistent oversupply of naphtha.
Around 1.1 million mt of arbitrage naphtha is expected to arrive in the Far East in July, down from 1.3 million mt in June.
SENTIMENT IMPROVES FOR MIDDLE DISTILLATES
The improved sentiment was similarly evident in the middle distillate complex. The FOB Singapore jet fuel/kerosene cash differential has remained positive for almost two weeks, something not seen since mid-2018. Premiums soared to a 59-week high at 26 cents/b to the Mean of Platts Singapore jet fuel/kerosene assessment last Wednesday, Platts data showed.
Traders have been keeping an eye out for trans-Pacific arbitrage opportunities since the first reports of refinery issues in July in California and amid peak seasonal demand for air travel.
While sources noted the USWC arbitrage route was shut, traders have remained active in sending North Asian jet fuel cargoes to the Americas, with some fixtures seen to have options to discharge into the US Gulf.
Likewise on the gasoil front, the Singapore gasoil cargo against front month cash Dubai spread breached $15/b in July for the first time since March 8, Platts data showed.
The regional refinery issues were driving demand, with Petron Singapore Trading purchasing 1.05 million barrels of 50 ppm sulfur gasoil for loading over June and July, and Vietnam’s Petrolimex buying 52,000 mt of 500 ppm sulfur gasoil mid-July via private tender, market sources said.
However, in contrast to gasoline, industry sources doubted the firm sentiment for middle distillates could be sustained going forward.
The strength in Asia makes the Exchange Futures for Swaps — the difference between 10 ppm Singapore swaps and ICE low sulfur gasoil futures, a key measure of the arbitrage window between Europe and Asia — unviable for diverting surplus barrels from Asia and the Middle East to the West.
“Given the arbitrage is shut, it is very difficult to see market supportive; the East needs to price lower from here,” said a trader based in Singapore.
The August EFS was assessed at minus $3.31/mt Friday after rising $2.20/mt in a span of five days, Platts data showed.
HSFO CARGOES EMERGE
Notably, the issues at regional refineries have had an additional impact in the unexpected supply of high sulfur fuel oil.
The issues at Nghi Son were heard to have prompted the refinery to sell via tender 20,000 mt of 1,300 CST atmospheric residue straight run HSFO with maximum 5% sulfur for loading in early July — the first time such a cargo has been sold since the refinery commenced operations in mid-2018.
The refiner was also heard to have offered 40,000 mt of HSFO with similar specifications via tender for loading over July 10-August 15. The results of both tenders were not known.
A source close to the matter said it was unlikely the refiner would have more HSFO cargoes after the July-August loadings.
The additional supply from Vietnam has also failed to ease broader supply tightness in the market.
The 380 CST August/September spread started to soar mid-June due to a drop in the inflow of arbitrage cargoes from Europe and the US. The timespread surged to $28/mt last Wednesday, the highest since May 2010, Platts data showed. This was sharply higher than the $11.50/mt it was assessed at on June 26, when Nghi Son issued its first HSFO tender.