Refinery run cuts in China, Japan prompt crude suppliers to slash offers
As major Northeast Asian refineries continue to slash their run rates and crude throughput levels in the wake of the coronavirus outbreak, various crude suppliers from West Africa, Far East Russia and the Americas look poised to sweeten their offers in the Asian market.
Asia has been grappling with plunging fuel demand since the coronavirus epidemic in China in late-January, with construction, manufacturing and transportation activities seen coming to a halt across major regional economies.
China’s road transportation turnover fell 44.1% on the year to 1.12 billion people in January on a one person per 100 km/day basis, the Ministry of Transportation data posted on its official WeChat platform showed.
Asphalt demand from infrastructure construction has also been halted countrywide amid the outbreak, said an official at state-run China North Industries Group Corp., also known as Norinco.
In Japan, the country’s major carriers said Thursday they will suspend some of their flights to Beijing and other Chinese cities.
All Nippon Airways’ flights to China will drop to 288 flights a week from 330 before the outbreak. The number was already down to 316 after the flights to Wuhan were suspended, according to company officials.
Starting February 17, JAL also plans to reduce its flights to China to 43 a week, down 56% from the current 98 flights.
Reflecting the subdued Asian oil demand fundamentals and subsequent decline in refining margins, offers for various crude grades have already started to free fall and some cargoes have changed hands at sharply lower spot differentials from the previous trading cycle, refinery officials and trading managers said.
Far East Russia’s Sokol crude, for one, saw a recent cargo sold at a much lower premium compared to some of the spot deals done in the previous month.
An April 8-14 loading cargo was sold by India’s ONGC Videsh last week at a premium of around $4.30/b to Platts Dubai crude assessments, CFR North Asia.
In comparison, March-loading Sokol crude cargoes had traded at premiums in the range of around $7-$8.50/b to Platts Dubai, CFR North Asia.
“The world depends heavily on China for oil demand growth. So when China’s demand is down, [Asia-bound cargo] price [differentials] will likely follow,” JY Lim, oil markets adviser at Platts Analytics, said.
Americas, West African crudes
Elsewhere, offers and traded levels for Brazil’s Lula crude, a favorite among many Chinese independent refiners, were plunging as interest from the group dissipated while some decided to shun purchases altogether.
Offers for April-arrival Lula crude cargoes were heard this week at premiums of around $3/b to Platts Dated Brent, DES Shandong, trading managers at multiple independent refineries with direct knowledge of the matter told S&P Global Platts.
Last week, trades for April-arrival cargoes were being done at premiums in the $4s/b to ICE Brent, DES Shandong while a month ago, March-arrival cargoes were trading as high as premiums of around $8.50/b to ICE Brent.
West African crudes were also under pressure, with around a dozen March-loading Angolan crude cargoes still looking for an Asian outlet this week.
Angola’s Pazflor traded last week at a premium of 20 cents/b to Dated Brent, FOB for a March-loading cargo. February-loading Pazflor cargoes in comparison had traded at premiums above $2/b to Dated Brent, FOB.
China, Japan throughput
Multiple refineries in China and Japan have recently reported a sharp drop in operation rates and many more plan to cut crude throughputs over the coming weeks and months, painting an even more bearish picture for Asia-bound crude price differentials.
Japanese refiners collectively processed 20.29 million barrels, or 2.9 million b/d, of crude oil over February 2-8, down 3.6% from the week before, the Petroleum Association of Japan said Thursday.
The February 2-8 crude throughput dropped to the lowest level in 16 weeks at 2.81 million b/d over October 20-26, as refiners had slashed their jet fuel and kerosene production.
China has reported heavy throughput cuts across all refineries, as much as analyst estimates of around 2 million b/d.
These include the world’s biggest refiner Sinopec, which was said to have cut its throughput by 600,000 b/d this month from January, while PetroChina cut 320,000 b/d. At least 12 independent refineries in Shandong province said combined 795,000 b/d of capacity have been temporarily shut.
Norinco plans to cut its daily throughputs further to 77% of capacity later this week, the refinery official told Platts.
The refinery had planned to cut run rates to 80% of capacity early this week, down from 100% in January, due to the coronavirus outbreak.