Analysis: Rebound in margins a sweet illusion for Asian crude producers as demand remains weak

Singapore — Recovering product margins in the wake of Monday's plunge in crude oil benchmarks will likely prove a sweet illusion for Asia's low sulfur crude oil producers, with traders noting Tuesday that demand in the region remains weak amid the continuing spread of the coronavirus.

Saudi Aramco over the weekend slashed the price of its crude exports for April after OPEC and key ally Russia failed to agree to a production cut, sending crude oil prices tumbling to lows not seen since 2016.

Asian sweet crude benchmark Platts Dated Brent was assessed at $35.45/b Monday, down $10.16/b from last Friday and at the lowest since February 2016.

An unintended side-effect of the price plunge has been the recovery in crack spreads.

Product margins across the barrel jumped $1-$4/b following the weekend developments as a fall in oil product prices typically lags a plunge in upstream crude oil.

The M2 Singapore 10 ppm gasoil crack spread against Dubai crude was assessed at $11.91/b at 4:30 pm Singapore time Monday, up $2.95/b from last Friday, while the Singapore 0.5% marine fuel oil crack spread against Dubai crude was assessed at $9.78/b, up $1.60/b over the same period.

However, trade sources were quick to point out the artificiality of the surge. Fundamentals in the region remained weak with the coronavirus outbreak still hammering demand for products across the barrel, and some refiners were heard struggling to sell their output.

"Our refinery cannot sell product, and those in our inventories have been devalued. So our refinery cannot buy crude," a source said.

In South Korea, SK Energy is reducing its crude run rate to 85% until the end of March, compared with 95% a year earlier, to balance weakening demand for oil products, a company source said, adding it may further reduce the rate in April.

South Korea's other refiners GS Caltex, S-Oil and Hyundai Oilbank are also considering cutting run rates amid weakening demand for refined products, industry sources said.

In China, domestic product demand remains weak amid the coronavirus outbreak, which will keep refining throughput low and push up crude inventories, an official at state run Sinopec said.

This is not expected to bode well for Vietnam's PV Oil or Malaysia's Petronas, who supply the bulk of Asia's spot sweet crude cargoes.

Traded levels for crude oil from both countries are determined mainly by product margins, particularly those for middle distillates and low sulfur fuel oil, and influenced by geopolitical events like the current force majeure in Libya.

Margins for jet fuel and gasoil have been on a downtrend since the start of 2020, with the decline accelerating in February due to the coronavirus. Jet fuel crack spreads in February touched lows not seen since 2004.

MALAYSIAN, VIETNAMESE CRUDES SET TO TRADE LOWER

In line with the weaker sentiment, three sweet crude traders in Asia said Vietnamese crudes were expected to fetch premiums in the $5s/b to Platts Dated Brent, FOB, for May-loading cargoes this month, down from premiums in the $6s/b to Dated Brent, FOB, for April-loading cargoes traded last month.

Malaysian crudes were expected to trade at premiums in the $6s/b to Platts Dated Brent, FOB for May-loading cargoes. Differentials for April-loading Malaysian crude cargoes last month were already deflating, with a Miri crude cargo heard sold at a premium of around $6.50/b to Platts Dated Brent late in the trading cycle.

Prior to this, a March-loading cargo of Labuan crude, a comparable Malaysian grade to Miri, traded in January at a six-year high at around a $9.60/b premium to Dated Brent, FOB.

"Moving forward, with cheap Persian Gulf barrels and the corresponding decline in the value of Western barrels, the MCO market will be under pressure," one trader said.

"Vietnamese crudes will definitely be in the $5s/b [premium to Dated Brent, FOB]. The LSFO crack now is so-so," a second trader said.

Nonetheless, some trade sources noted the resilience of the Asian sweet crude market in the past, with differentials often surprising on the upside after expectations of weaker sentiment.

Several refineries in Asia, particularly in Australia or Southeast Asia, are configured to run almost entirely on low sulfur crude, and hence will see little impact from plunging OSPs from Middle Eastern producers.

Trade sources noted the force majeure in Libya, as well as stubbornly high offers for West African crude cargoes amid rising freight rates, were also propping up the Asian sweet crude market.

"The regional crude market is unique and the Malaysian crude oil market is especially unique; it depends on customers' diet and appetite," a source at a regional oil producer said.