Delayed Chinese fuel flood risks more pain for Asia refiners

Already struggling with weak demand for diesel, jet fuel and gasoline, Asian refiners look set to be hit by a deluge of Chinese supply.

Fuel tanks have been filling up in Asia’s biggest economy as the coronavirus pummeled demand. And while refinery run rates have also been cut, the output reductions are unlikely to have been deep enough to offset the lower consumption. Now, as Chinese increasingly return to work, refiners are looking to ramp up exports to free up more storage space.

See also: China Amassing Commodity Mountain That Risks Crushing Prices

The coronavirus hasn’t been fully priced-in as China hasn’t been able to export much fuel so far because of logistical constraints, said Sri Paravaikkarasu, director of Asia oil at consultant FGE. Stockpiles have been growing, and diesel and gasoline exports are likely to rise significantly in coming weeks, she said.

Virus-driven disruption of China’s economy has resulted in an estimated 4 million barrels a day of lost oil demand, the most since the global financial crisis, according to Goldman Sachs Group Inc. For oil and other energy products, any disruption in demand will be deemed as lost, while lower consumption for other commodities such as steel and aluminum could just be deferred until later, the bank said in a note.

While fuel product margins rebounded Friday as crude plumbed new lows, the outlook is still looking shaky. Here’s a closer look at the oil-products markets.

Jet Fuel

Jet fuel has been the hardest-hit oil product as airlines around the world cut flights due to companies and consumers avoiding inessential travel. The premium of jet fuel prices to Brent crude in Singapore has plummeted about 50% this year, and reached a record low of $4.13 a barrel on Thursday.

The situation looks likely to worsen as cases and deaths spike in South Korea, Iran and Italy. JBC Energy is forecasting global demand for jet fuel to drop by 3.7% in the first half of 2020 from a year earlier. While Asian refiners have been increasing shipments to Europe and California, the potential gush of Chinese exports doesn’t bode well for the near-term outlook.

See also: Jet Fuel’s Luster Tarnished by Virus With Demand in Doubt

Diesel

Profits from converting Dubai crude to diesel in Asian refineries have plunged around 40% this year and fell to the lowest in data going back to March 2018 on Thursday. Margins could easily drop further given the extent of the hit to Chinese consumption.

Demand for diesel in Asia’s largest economy, where it’s used as an industrial and transport fuel, will fall 38% in this quarter from a year earlier, Morgan Stanley said in a note that cited figures from CNPC Economics & Technology Research Institute. Chinese exports of diesel likely dropped to 1.4 million to 1.5 million tons in February, from 2.2 million tons in January, according to consultant JLC, highlighting the potential for a sharp uptick this month.

China’s average daily diesel exports in February increased to about 550,000 barrels from 490,000 barrels in January, according to a Feb. 29 note from Vortexa. That’s the highest monthly exports since March 2019, according to the oil analytics firm.

Gasoline

While Chinese highway traffic has been picking up over the past couple of weeks, gasoline demand is still likely to be 31% lower this quarter that a year earlier, according to the CNPC data cited by Morgan Stanley.

The premium of Asia 92-RON gasoline price in Singapore over Brent, which had been holding up better than those for jet fuel and diesel on hopes China wouldn’t export large quantities of the fuel due to run cuts, has tumbled over the last week. It’s plunged 57% since Feb. 21 to the lowest since June 2019.

Unplanned outages at refineries in Louisiana and California last month may cushion the blow to Asian refiners. Still, a halving of Chinese gasoline exports in February from January, according to JLC figures, gives an indication of the potential for shipments to increase this month.

Naphtha

The outlook for naphtha, a feedstock used to produce various types of plastic, is also worsening after it was initially relatively unaffected by the virus due to supply shortages in the Middle East.

However, that’s changed in the last couple of weeks as petrochemicals producers outside of China have started cutting run rates as stockpiles swell and demand wanes. The first-month Japan naphtha crack spread to Dubai crude plummeted to -$2.46 a barrel on Monday, the lowest in five weeks.

See also: Virus Pushes Asian Petchem Makers Outside China to Cut Runs

FGE sees the overall demand loss for Asian oil products at 2.3 million barrels per day this month, following a 4.5 million barrel-a-day hit in February.

One ray of hope for Asian refiners is the spring maintenance season, which may help stem the drop in profits from converting crude to fuels, Paravaikkarasu said. About 1.78 million barrels a day of Asian refining capacity will be offline this month, growing to 3.1 million barrels per in April, she said.