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Asian refiners back OPEC+ cut but fret over regional oil demand on weak macroeconomics

Refiners across East Asia have been supportive of the latest OPEC+ decision to cut production to some extent as the move aimed to inject some stability to the sharp downtrend in benchmark crude prices seen in March, but middle distillate marketers are concerned that a new price uptrend would be detrimental to regional oil demand amid Asia’s fragile consumer confidence and high inflation.

Asian refiners share the same sentiment with major OPEC+ crude producers to the extent that they do not like seeing any sharp and rapid decline in prices, which would often incur hefty inventory losses, according to trading and fuel marketing sources at various regional refiners, including PTT, SK Innovation, Cosmo Oil and CPC Taiwan over April 6-12. Refiners would also wish to avoid having to sell their refined products at much lower outright prices than what they paid for their feedstock crude in prior months, they added.

“If prices fall or trend lower gradually, it is much easier to hedge and protect the value of our inventory barrels, while margins for the prompt and forward month [refined product] export cargoes would generally be maintained,” a trading and marketing manager at a Japanese refiner said.

“It’s a complete different story if [benchmark crude] prices fall $10/b or more within a matter of a few days or weeks,” a middle distillate sales and marketing source at a major South Korean refiner based in Incheon said. People would generally assume that refiners would always prefer lower crude prices so they can buy their feedstock cheaper, but highly export-oriented South Korean refiners are extremely sensitive to a decline in outright oil product prices as well, the South Korean marketing source added.

In terms of the overall economic picture, however, a fresh upward momentum in oil prices following the OPEC+ production cut decision April 2 would hurt Asian consumer spending and confidence, which has been extremely fragile amid high inflation, weak local currencies and tepid economic growth, middle distillate marketers at South Korean, Japanese and Thai refiners said.

A further uptick in benchmark oil prices above $90/b, on top of the US dollar’s strength against the basket of Asian currencies, would lead to tighter private and middle-income household spending, putting severe pressure on Asia-wide transportation and industrial fuel sales, according to oil product marketers at Thai and Japanese refiners and a senior market research analyst at Korea Petroleum Association based in Seoul.

Inflation, tourism, Thai oil demand
Although Thailand’s tourism has been staging a gradual recovery over the past year, the road to full pre-pandemic level recovery in tourist arrivals appears far-fetched. A rise in inflation driven by higher oil and overall energy prices could typically dampen the overseas travel desire of young consumers and middle-income families in advanced Asian economies such as South Korea, Japan, Hong Kong and Singapore, a middle distillate marketer and a regional oil demand analyst at PTT said.

Tourist arrivals play a significant role in Thailand’s domestic automotive and jet fuel sales. The country’s tourism sector faces headwinds when consumer confidence in major tourist sources such as South Korea and Japan falters, putting pressure on PTT’s typical annual domestic oil product sales of around 1 million b/d, the analyst at the state-run Thai oil company said.

The number of international tourist arrivals in Thailand reached 11.15 million in 2022, sharply above 430,000 in 2021 but still far below the 2019 peak of 39.8 million, indicating considerable room for improvement.

With international borders opening up after COVID-19 restrictions, cross-border travel has gained some momentum. However, private spending and consumer sentiment in South Korea are extremely fragile, as higher oil and gas prices have led to a sharp jump in utility bills and pump prices, the KPA analyst said. This means overseas travel is the last thing on South Korean consumers’ minds, the analyst added.

With the Japanese yen hovering around a 24-year low and the South Korean won changing hands at around a decade-low against the US dollar, consumers are generally expected to limit overseas traveling during the late spring and peak summer holiday periods. Refiners are focusing more on domestic sales than exports, according to diesel and gasoline sales strategists at major South Korean and Japanese refiners.

Costs of living in Japan
Massive hikes in costs of living are driving Japanese households to save on gasoline to kerosene, causing downward pressure on oil product sales in Asia’s third-biggest oil-consuming nation, S&P Global Commodity Insights reported previously.

Weak demand has negative consequences on the prices of oil products. The monthly average of Japan’s gasoline and gasoil assessments fell for three consecutive months until March from the previous year, while the kerosene assessment decreased for two consecutive months, according to S&P Global.

Although annual headline inflation in Tokyo cooled a little bit to 3.3% in March from 3.4% in February, the core inflation — which strips away energy and fresh food prices — accelerated for fourteen consecutive months to 3.4%, a 33-year high since January 1990, according to government data.

The current administration led by prime minister Fumio Kishida plans to spend more than Yen 2 trillion ($15.3 billion) as part of its effort to cushion the impact of inflation. The package includes cash handouts to low-income families and subsidies to liquified petroleum gas users in rural areas.
Source: Platts

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