Cheap blendstocks fail to spur interest in Asia as August gasoline demand remains muted

Singapore — Weakening gasoline demand and concerns over a second wave of coronavirus outbreaks in Asia have set a bearish tone for the regional blending market in August, with participants expecting already low blendstock prices to remain subdued throughout the second half of the month.

The spread between the FOB Korea toluene physical price and CFR Japan naphtha, an indicator of the profit margin for the key component sought by regional blenders to produce finished grade gasoline, averaged $10.68/mt over July 16-30, well below the typical breakeven level of more than $100/mt, S&P Global Platts data showed.

The spread hit an historic low of minus $2.125/mt at the Asian close on July 21.

Reflecting the weak blending market, Thai refiner PTT was heard to have sold a cargo of 101 RON reformate for early to mid-August loading at a discount of around minus $1-$1.50/b to the August average of Mean of Platts Singapore 97 RON gasoline assessments.

"The heavy discount levels for blendstocks just goes to show the bearishness in the downstream blending market," a Singapore-based market source said.

Asia's gasoline market has been subdued for most of 2020 to date, with crack spreads – the relative measure of the price of gasoline against Brent crude oil – in negative territory from mid-March to early June as the coronavirus pandemic curtailed driving activity amid multiple nationwide lockdowns.

Although a subsequent easing of lockdown restrictions in several countries has since buoyed demand, a fresh wave of outbreaks in Vietnam, the Philippines, Japan and Australia have dragged down demand expectations in the near term, sources said.

CHINA DEMAND FADES

Moreover, China's appetite for blending components, which had been strong in May as domestic demand for gasoline surged as lockdown measures eased, fell again in June and July as widespread flooding and new movement restrictions imposed in cities such as Beijing and Xinjiang crimped demand.

"China is no longer buying mixed aromatics; most people who had prepared to sell into China found themselves with excess supplies," a Singapore blendstock trader said.

Agreeing, another source said: "There are a number of tanks [in Singapore] full of components that are not being used."

Against this backdrop, China's rising gasoline exports have increased the availability of finished grade gasoline in the region, further reducing the need for blenders to seek components.

"If you blend, at most you will take in smaller parcels. The blending margin is so poor it's just better to buy the finished grade," another Singapore trader said.

Demonstrating the weak blending margin, the Singapore reforming spread - the difference between FOB Singapore 92 RON gasoline and the FOB Singapore naphtha derivative - averaged $4.77/b in June and $3.19/b in July, down sharply from $13.86/b in June 2019 and $14.46/b in July 2019, Platts data showed.

The reforming margin was assessed at $4.81/b Aug. 11, inching down from $5/b the previous session.

"Saying that the blending margin is bad is an understatement. It has been bad for most of this year," the first Singapore-based source said.