Asia oil products: Q2 outlook and factors to watch

The Asian oil products market is heading into the second quarter amid a tighter supply outlook for gasoline and LPG, while jet/kerosene and fuel oil markets are seeing signs of plentiful supply and relatively weaker demand. The following are some factors that traders said might influence various oil products in Asia in the April-June quarter.
GASOLINE
A confluence of bullish events will keep the Asian gasoline market buoyed in Q2, although the emergence of new refining capacity will likely cap the market’s recovery. The market was expected to find support in the short term from tighter supply amid Asian refinery turnarounds. According to data from S&P Global Platts Analytics, China will see a total 900,000 b/d of refining capacity go offline in April. Outside China, Thai refiner Thaioil will shut its 180,000 b/d No. 3 CDU from mid-June, while South Korea’s GS Caltex will shut the 94,000 b/d RFCC at its Yeosu refinery in late April.
Several countries such as Indonesia, India and the Philippines are holding elections in Q2, which will likely see them stocking up on gasoline. On the supply side, China Hengli Petrochemical’s 400,000 b/d refinery and Malaysia’s 300,000 b/d RAPID refinery in particular will be at the forefront of market attention as participants eye the first gasoline cargoes from both refineries. The benchmark FOB Singapore 92 RON gasoline physical price hit a 5-month high at the close of Asian trade on March 26 at $75.69/b and has remained firmly above the $70/b mark since March 7.
NAPHTHA
The outlook for the Asian naphtha market is rather mixed as a strong gasoline market and weak petrochemical-making margins are pulling the market in opposite directions. Demand from the petrochemical sector is expected to plateau or slip further as margins for key aromatics and olefins against naphtha have softened on the back of several cracker unit turnarounds. Both the ethylene-naphtha spread and the paraxylene-naphtha spread narrowed in the previous week, to a two-month low and eight-month low averaging $458.15/mt and $478.03/mt, respectively.
Moreover, the rally in naphtha physical cracks showed signs of losing traction as the market heads into Q2. The CFR Japan naphtha physical cracks slipped in eight trade sessions to $40.30/mt on April 5 from the year-to-date high of $61.675/mt on March 26. Regional condensate prices have been competitive and are spurring buying interest among some end-users in North Asia.
LPG
The Asian LPG market is expected to find support from a tight supply outlook in Q2. Not only have the OPEC and non-OPEC coalition-led crude production cuts reduced associated gas production, Washington’s sanctions on Iran-origin cargoes have also squeezed availability. Spot supply from the Persian Gulf has dried up and backwardation in the Saudi propane CP front-month timespread remained $30/mt or higher for May/June. This spread did not surpass $24.50/mt in 2018, but in March this year reached a two-year high of $51/mt due to the supply squeeze, according to S&P Global Platts data.
One the demand side, US LPG is being exported directly to India in a new evolution of global trade flow, with four Very Large Gas Carriers laden with LPG set to reach India in April, and further cargoes set to be delivered in May and June. The supply crunch is expected to ease for cargoes arriving from June, as Indian demand is expected to ease after the federal elections.
GASOIL
The Asian gasoil market is likely to remain balanced in Q2 as additional fresh spot barrels stemming from China’s export quota swap and refineries coming on stream will likely offset any reduction in exports as regional refineries trim outflows due to scheduled turnarounds. China swapped 509,000 mt gasoline export quotas for gasoil quotas, lifting total gasoil quotas to 9.41 million mt to date in 2019. But even with the quota swap, China’s monthly gasoil exports were more likely to average around 1.51 million mt.
On the demand side, India’s unusual move to ramp up gasoil imports from April is a sign that the upcoming federal elections and refinery turnaround plans may squeeze domestic availability. A recovery in regional demand saw cash differentials for ultra-low sulfur diesel loading from the main trading hub of Singapore climb over the first quarter, recouping much of its losses from the previous quarter. Cash differentials for 10 ppm sulfur peaked at minus 2 cents/b to Mean of Platts Singapore gasoil assessment on March 12, up from minus 69 cents/b on January 2.
JET/KEROSENE
The Asian jet fuel/kerosene spot market looks set for a bout of prolonged weakness in Q2 as the aviation fuel market heads into a period of seasonally poor demand before summer. FOB Singapore jet fuel/kerosene cash differentials averaged plus 35 cents/b throughout April-June 2018, lower than the plus 62 cents/b average in Q1 2018. Traders expect this trend to be especially pronounced this year as the market continues to reel from a milder-than-average winter that left the region adequately supplied at the end of Q1.
Traders said that recent refinery launches would also work to exacerbate the supply glut. In particular, Hengli Refining and Chemical Co said its 400,000 b/d refinery in Dalian had recently produced on-specification jet fuel. This is a step closer towards the refinery starting commercial operations. The refinery was designed to produced 3.6 million mt/year of jet fuel. Some traders expect that with stock levels relatively high in Europe, the recent trend of Middle Eastern cargoes heading to Singapore could continue in Q2.
FUEL OIL
The Asia high sulfur fuel oil market heads in Q2 on a less upbeat note on expectations that an overall supply overhang would continue to put downward pressure on the market. Market sources estimate between 4 million mt and 4.5 million mt of western arbitrage fuel oil will arrive in Singapore in April, more or less in less line with volumes that were shipped east in March. With the end-user bunker fuel market in both Singapore and key regional bunkering hubs registering less than robust demand, the market was looking well-supplied for most of April.
Going into the latter half of Q2, Asia fuel oil market fundamentals are expected to garner support, led largely by relatively lower supply from the Middle East due to a pick-up in local demand there. Ex-wharf 380 CST bunker fuel term contracts for Q2 were offered at $5/mt over the Mean of Platts Singapore 380 CST HSFO at the world’s largest ship refueling destination. Even though the offers were lower than the $7-$7.50/mt levels at which contracts for ex-wharf 380 CST bunker fuel supply were concluded for Q1, buyers have been less than forthcoming.
Source: Platts