Analysis: North Asian refiners reassess fuel output, exports amid coronavirus outbreak

Fundamentals in Asia's gasoil and gasoline markets are expected to stay weak, prompting North Asian refiners to reassess refining and export plans amid faltering consumer demand following an acceleration in the spread of the coronavirus outside China.

In South Korea, transportation, construction and manufacturing activities came to a halt after President Moon Jae-in on February 23 raised the country's alert level to its highest for the first time in a decade.

This was prompted by a surge in the number of confirmed infections, which stood at 4,212 with 22 deaths as of Monday morning, according to media reports.

The Japanese government similarly approved its basic policy principle on February 25 for its response to the coronavirus with measures including advising the public to avoid large gatherings to prevent further spread of the virus.

"Domestic demand [for motor fuels] is sure to take a hit as people go out less and driving slowing," one Singapore-based source noted, adding that "barrels have to find a home somewhere."

Gasoil and gasoline make up a significant portion of major oil refined product exports from South Korea and Japan. In 2019, gasoil and gasoline exports from South Korea totaled 195 million barrels (around 22.981 million mt) and 88 million barrels (around 13.586 million mt) respectively, according to data from the Korea National Oil Corporation.

Japanese export volumes for both products in 2019 totaled around 25.212 million mt, or 39% of total exports, data from the Ministry of Economy, Trade and Industry also showed.

In contrast, China -- the world's largest exporter of refined products -- exported 21.38 million mt of gasoil and 16.37 million mt of gasoline in 2019, Platts previously reported.

RUN CUTS AND EXPORT UNCERTAINTY

In the face of an uncertain regional outlook and domestic demand poised to decline with active steps being taken to control the spread of the virus, North Asian refiners might follow in China's footsteps by cutting run rates as well as shifting barrels to other non-traditional destinations, sources said.

The former has been evident among Japanese refiners, who are mulling an extension of low output plans beyond March due to the growing number of flights being suspended as well as slowing gasoil demand for trucks.

For South Korea, China is the biggest destination for oil product exports and with sluggish Chinese demand, "exports of auto fuels are likely to decline mainly because of weak demand in China, the epicenter of the COVID-19 virus," said one refinery official.

That said, traders have raised concerns that South Korean refiners would turn toward the regional market to sell excess cargoes, a scenario that would weigh on an already pressured regional complex.

"Incremental barrels from other refiners will hurt the market. We already have to factor in the rise in Chinese supply," a second source said.

According to data from S&P Global Platts Analytics, China's gasoil exports in March are already forecast to surge to around 680,000 b/d, or 2.83 million mt, past the record high of 652,000 b/d seen in March 2019. Gasoline exports likewise are projected to hit around 450,000 b/d, or 1.64 million mt, in March.

In line with the bearish expectations, the FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude futures tumbled to a month-to-date low of $3.96/b at the Asian close Thursday, recovering marginally to $4.05/b Friday.

On the Asian gasoil end, the FOB Singapore gasoil physical crack spread to front-month cash Dubai has weakened as well. For February, the physical gasoil crack spread to front-month cash Dubai averaged $11.75/b, down from $12.21/b for January. The decline is even sharper on an year-on-year basis, with the February 2019 gasoil crack spread to cash Dubai averaging at $14.30/b, according to Platts data.

OUTLETS OVERSEAS

Still, the weaker regional complexes have opened arbitrage opportunities for some industry players to move barrels out of Asia.

On the gasoline side, the moves comes amid tighter US supply and an approaching summer season, which has propped up appetite for barrels in the West, sources said.

LR1-tanker Hafnia Europe for example, was noted to have been placed on subjects for a Brunei to Persian Gulf voyage, while LR2-tanker Navig8 Providence was also heard to be have been placed on subjects for end-February loading for a Singapore to East Africa journey, shipping sources said.

"People are rushing to move cargoes out of Asia before Chinese [gasoline] supply in March comes out," another trader noted.

Meanwhile, some cross-regional flows of gasoil have also been seen moving, even though traders said arbitrage economics are generally unworkable for most in the market at the moment.

"It depends on when the hedging was done, so those vessels that are moving could be able to as they were fixed earlier," a source said.