The Unthinkable can happen – that gasoil can turn negative, predicts Yaw Yan Chong, Director of Oil Research, at financial markets and infrastructure data provider Refinitiv.

“The primary reason for this is simply an oversupply of the product, especially in Asia, which is the largest exporter in the world, as a region; and insufficient demand to soak up the supplies,” Yaw told Singapore bunkering publication Manifold Times in an exclusive interview.

“The supply-demand situation is worse than in April, when the impact of Covid-19 was the strongest in the oil market, when gasoline and jet fuel margins fell into the red and hit record-lows. In contrast, 10ppm-Dubai averaged at $6.90/bbl for the month then.”

Near-record low of gasoil margins for Asia and Europe

According to Yaw, gasoil margins (as represented by the crack spread between Singapore 10-ppm and Dubai for Asia, and London Gasoil (LGO) and Brent for Europe) have been at or near record lows since mid-September, with their respective front-month contracts at $2.80/bbl and $2.88/bbl.

Refinitiv data showed LGO-Brent M1 hitting an all-time low of $2.48/bbl on 16 September and 10ppm-Dubai its second-lowest level on record at $2.47/bbl on 17 September, versus the all-time low of $1.77/bbl in May this year.

LGO-Brent M1

10ppm-Dubai M1

Asia’s top four refiners – China, India, South Korea and Japan – sharply slashed refinery runs from March to April, hitting an all-time low of 80.45% of the 4 countries’ total capacity of about 27 million bpd. Since then, runs have been restored, hitting 84.81% in July, though still under the 5-year average of 86.52%.

In comes China into the picture – with high storage volumes

Although the region’s overall refinery runs remained below average, China’s runs hit record-high levels of around 90% of its 15.6 million bpd capacity for the June-August period, amid record-high crude imports of over 11 million bpd for each month of May-September, noted Yaw.

He explained the record-high crude imports has translated into rebounding output of refined products from China, especially for diesel, which hit a 23-month high of 15.1 million mt in July.

Chinese exports of only 550,000 mt in the same month of July – a 5-year low, due to poor export margins – signalled large volumes were being stored in China.

In August, gasoil output from Chinese refineries eased to under the 5-year average at 14.2 million mt, while exports jumped to 1.8 million mt, steady versus the 2019 average.

“I expect China’s output to stay high going forward, particularly in view of their large crude inventories and the need to maximise their product export quotas of over 50 million mt for the year,” Yaw forecasts.

“Similarly, gasoil output at the other three major refining countries [India, South Korea and Japan] are also largely at 5-year average levels, with the total for all four centres at 30.1 million mt for July, close to the 5-year average of 30.4 million mt/month.”

Negative gasoil prices occur

“The large output, amid still-poor domestic demand in each of the four countries, means that refiners are forced to export, with outflows from India and South Korea at steady versus 2019 levels, respectively averaging at 2.55 million mt/month and 2.27 million mt/month for the April-August period, amid poor overall global demand,” he explains.

“If output continues at current levels, and demand remains curbed, particularly in view of widespread second-wave infections all over the world, gasoil margins can fall further and the unthinkable – that gasoil margins can become negative – can actually happen.”

Impact on bunker markets

Low or negative gasoil cracks will also mean lower outright gasoil prices due to the product being a key blending component to make Very Low Sulphur Fuel Oil (VLSFO) and marine gas oil (MGO), according to Yaw.

“I see this as actually positive for end-users, such as shipowners, and even traders/barge operators because their costs will become lower,” he says.

“This is certainly a good thing in an environment where credit is tight and financing difficult, following the implosions of Hin Leong, ZenRock, Coastal Petroleum, IPP, among others.

“This is, of course, negative for refiners; given that gasoil is typically the largest component of their yield. They can still stave off the threat of negative gasoil margins if they cut runs again, as they had done in March/April.

“I don’t think China will cut runs for the reasons stated above, while runs at the other three countries are still well below average, with India at 82%, South Korea at 88% and Japan at 65%; meaning the capacity to be cut is limited.

“I don’t see the situation improving until Covid-19 eases, and that doesn’t look like it’s going to happen till 2021.”

Photo credit: Refinitiv
Published: 24 September, 2020