China, Japan refiners tweak oil products slate as COVID-19 drives big swing in margins

The recent sharp swings in light and middle distillate crack spreads look set to drive major reshuffling in Asian refinery product slate, with state-run Chinese refiners lifting gasoil yield at the expense of jet fuel output, while Japan resorts to short-term refinery shutdowns to control fuel stockpiles.

Jet fuel has been one of the biggest underperformers in the Asian light and middle distillates complex in recent weeks, as consumer demand across the region took a big blow amid a series of flight suspensions announced by major airlines following an acceleration in the spread of COVID-19.

The jet fuel crack spread against Platts Cash Dubai averaged $8.82/b in February, down around 20% from January's whole-month average of around $11.10/b and December 2019 average of $12.85/b.

Other products fared better, with the gasoil crack spread against Cash Dubai down 3.7% from January average at $11.75/b in February. Over the same period, gasoline crack spread rose 73% from January at $8.35/b, while naphtha cracks rose 180% from January levels to minus $1.05/b.

State-run Chinese refining giants were quick to react to jet fuel's underperformance in the Asian market with both Sinopec and PetroChina stating that they will lower production of the fuel to minimal levels.

The state-run refiners would, instead, lift gasoil yield and use jet fuel/kerosene to blend into other distillates pool, refinery officials with close knowledge of the linear programming model and product slates told S&P Global Platts.

A Sinopec refinery based in Shanghai also plans to lift naphtha yield to increase production of petrochemicals, while cutting jet fuel output, a source with direct knowledge of the matter told Platts.

"It will take quite a while for jet fuel demand to recover as flights in foreign countries are also affected," a source with a PetroChina refinery said.

China's overall jet fuel production yield stood at 8.1% in 2019, grinding higher from 6% in 2014 as Chinese refiners invested in production facilities to meet the country's growing demand for aviation fuel.

However, S&P Global Platts Analytics expects the yield to remain flat in 2020, putting an end to the upward momentum seen over the past several years.

"Both the [jet fuel] yield and production for 2020 are likely to be flat along with a moderate growth of crude runs. On the back of a decline in demand, China is expected to export more jet fuel this year," according Platts Analytics.

Stockpiles management

In Japan, the sharp decline in outright benchmark oil prices raised alarm bells among refineries holding unsold fuel barrels, with the country's top refiner JXTG Nippon Oil & Energy conducting multiple planned and unplanned crude distillation unit shutdowns in a way to better manage jet fuel and gasoil stockpiles.

JXTG restarted the 90,000 b/d No. 3 crude distillation unit at its 180,000 b/d Mizushima B-plant in western Japan over the weekend after a 12-day unplanned shutdown.

The other CDU at the refinery, named No. 2, remains closed after having been shut on February 4.

Japan's crude throughput stood at 20.25 million barrels, or 2.89 million b/d, of crude oil over February 23-29, the lowest level in 17 weeks as refiners slashed jet fuel oil output, according to the latest Petroleum Association of Japan, or PAJ, data.

The country's jet fuel stocks stood at 4.97 million barrels for the week ended February 29, down 6.4% from 5.31 million barrels from the previous week, PAJ data showed. Gasoil stocks also fell 8.1% on the week to 8.44 million barrels.

Japan's prudent production and stockpiles management would bode well for the broader Asian cracking margins, refinery sources and traders said.