Singapore November 08, 2021: Spanish integrated energy firm Repsol reported today that its refining margin indicator doubled in the third quarter compared with the previous three months. But the company’s upstream oil and gas production continued to decline.
Asian oil refiners’ margins have rallied back to their highest since before the COVID-19 pandemic struck, spurred by a doubling of gasoil profits as the global economic recovery and power shortage drive demand for the fuel, analysts and traders said.
Gasoil demand has surged as power generators seek alternatives to record-high natural gas and coal and as industrial consumption has climbed while economies reopen from COVID-19 restrictions. That has pushed the gasoil profit margin nearly 60% higher in the past month, replacing gasoline as the key component of overall refinery profits.
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The Singapore complex refining margin, a proxy for Asian refiners’ profitability, jumped to more than $7 a barrel earlier this month, the highest since September 2019.
The rebound will incentivise Asian refiners to boost output in the coming months although regional supplies of refined oil products are expected to stay capped by declining Chinese exports and low inventories.
“We see improving momentum for Asian refiners ahead, benefiting not just from the near-term gas-to-oil switching this winter but also on peaking of Chinese oil products exports,” Citi analyst Oscar Yee said in a note, raising the bank’s outlook for South Korea’s SK Innovation (096770.KS), Thailand’s Star Petroleum Refining Pcl (SPRC.BK) and IRPC PCL (IRPC.BK), and Taiwan’s Formosa Petrochemical Corp (6505.TW).
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The release of pent-up demand could see regional gasoline consumption rising by some 100,000 barrels per day (bpd) over November and December, while gasoil demand is expected to rise by some 200,000 bpd between now and December, underpinned by the resumption of more economic activities, said Dylan Sim, an analyst at consultancy FGE.
“Low exports from China will continue to support Asia’s gasoil complex through to the end of 2021,” he said.
Also, middle distillate inventories across key storage hubs in Asia are at their lowest for this time of the year since 2013 and are now 9.1 million barrels lower than the 2017-2019 average, Sim said, after refiners cut output because of the recent lower profits.
Global power shortages caused by natural gas and coal price spikes will also drive consumers to switch to diesel for power. Consultancy Rystad Energy expects the switch in fuels to boost Asia’s oil demand by 400,000 bpd on average over the next six months. read more
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Refining profit margins for benchmark gasoil with 10 parts per million of sulphur in Singapore are at their highest since December 2019, while the margin for 92-octane gasoline has climbed about 50% in October, Refinitiv data showed.
“We see (gasoil) cracks increasing towards the end of the year, with demand expected to strengthen further over the agricultural season,” said Wood Mackenzie analyst Daphne Ho, adding that stronger demand for jet fuel and kerosene in the fourth quarter would prevent these fuels from being blended into the gasoil pool.
Also, Asian refiners would need at least a month or two to raise output as some plants are still shut for maintenance in October, a Singapore-based gasoil trader said.
“We can have slightly better (gasoil) supply from November, but still (that would be used) to cope with the potential increase in demand regionally,” the trader said.
NW Europe naphtha cracks are back in positive territory. This strength has predominantly been driven by a stronger LPG market. Surging natural gas prices have led to increased demand for LPGs, particularly as we move into the winter. This has left propane prices trading at a large premium to naphtha prices-as high as $124/t at one stage. As a result, for the petrochemical industry, there is a clear incentive to favour naphtha over propane as a feedstock.
We would expect this trend to continue through the northern hemisphere winter, which should prove supportive for naphtha cracks for the next couple of months. However, once we are through winter, we believe that the naphtha market will come under pressure once again as we move through 2022. We would expect propane prices to fall back to a discount to naphtha (in line with seasonal norms), while we also expect to see an improvement in naphtha supply. As we continue to see a broader recovery in oil demand next year, this should drive refinery runs higher.
Naphtha inventories in the ARA region are broadly in line with the five-year average, standing at 291kt according to Insights Global.
A downside risk for naphtha is if power rationing in China intensifies through to year-end. The petrochemical industry is identified as an energy-intensive industry. So, if it is forced to reduce operating rates significantly, this would weigh on feedstock demand.
Eurobob cracks have been more subdued recently, and in fact have trended lower over September and October so far. US gasoline inventories have started to edge higher once again, after bottoming in mid-September, and with peak demand now behind us, and refineries in the Gulf Coast having largely recovered following hurricane Ida, stocks will likely continue to edge higher. It’s a similar story for the US East Coast where inventories are moving higher from the recent lows.
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US implied gasoline demand is already back at pre-Covid levels, which suggests limited further upside in demand. If anything, we will see a seasonal slowdown in gasoline demand towards the end of the year.
European gasoline inventories are still near to the five-year low for this time of year, but with seasonally weaker flows to the US towards the end of the year, we should see these build.
Relative to middle distillates, we would expect the gasoline market to be more subdued. We currently forecast the Eurobob crack to average $8/bbl and $9/bbl in 4Q21 and 1Q22 respectively. While over full year 2022, we forecast the crack to average between $11-12/bbl amid a further recovery in travel demand.
Repsol’s refining margin indicator — a benchmark based on European crack spreads weighted to the firm’s typical refinery yield — jumped to $3.2/bl in July-September from $1.5/bl in April-June and a negative $0.1/bl in the third quarter of 2020. It reflects the gasoline-led recovery in regional refining margins over the summer.
The firm ran at 81pc of its 895,000 b/d nameplate Spanish refining capacity in the third quarter, 10 percentage points higher than in the previous three months, supported by the restart of refinery units that were idled during the Covid-19 pandemic and lower maintenance activity.
Upstream, Repsol’s oil and gas production fell by 5.5pc on the quarter and by 14pc on the year to 530,000 b/d of oil equivalent (boe/d). The biggest quarter-on-quarter decline was in North America, where output of 147,000 boe/d was 11,000 boe/d lower than April-June as hurricane-related shut-ins in the US Gulf of Mexico more than offset rising onshore shale output.
Output from Russia and Asia dropped by 10,000 boe/d on the quarter to 48,000 boe/d, reflecting Repsol’s exit from Russia earlier this year and the impact of rallying crude prices on production-sharing contracts. And production from Latin America and the Caribbean fell by 3pc on the quarter to 244,000 boe/d, hampered by unplanned downtime in Peru and Trinidad, which earlier this year prompted Repsol to cut its forecast for full-year 2021 production by 4-5pc.