Asian oil product traders find alternatives to lighten looming supply glut

Singapore — Asian oil product participants have turned toward alternative options such as overseas outlets and storage in a bid to alleviate the pressure off a looming regional oversupply, as fundamentals in the region steadily falters along with the continued spread of the coronavirus.

Oversupply concerns came to the fore in the Asian light and middle distillate markets as Chinese refiners have been desperately seeking overseas outlets for their oil products since late-January as domestic demand continued to slide with construction, manufacturing and transportation activities coming to a halt due to coronavirus pandemic.

As a result, China's total oil product exports rose 16.6% year on year to 10.75 million mt in January-February, latest data from the country's National Bureau of Statistics showed.

"Given the rate of which cargoes have been chartered, we are looking at a possible record high exports from China in March," one Singapore based source said.

Surplus volumes would have to make their way to wider global markets as Asia struggles to digest the excess barrels amid faltering consumer and industrial fuel demand, refinery officials and analysts said.

In the "worst case scenario," Platts analytics last week forecast a 0.95 million b/d decline in oil demand in 2020, while the "best case" projects 0.24 million b/d growth. If the global oil demand falls, it would be the first decline since the financial crisis of 2008-2009, it said.

GASOLINE TRADERS LOOK OVERSEAS

On the gasoline front, traders have turned toward outlets outside Asia to ease the mounting pressures, with Africa and Mexico becoming viable outlets.

Petroineos– a joint venture between Chinese state run Petrochina and European INEOS group – had earlier placed on subjects, LR2 tanker STI Steadfast, to load gasoline in mid-March for a North China to West Coast Africa voyage, while Russian firm Lukoil, was also noted to have placed LR1 tanker Jag Aabha on a Sikka to West Coast Africa voyage for end-March

"People are looking at Africa as an outlet to send cargoes given that they are seasonally moving toward a summer driving period," one gasoline market source said.

Mexican buyer PMI has also reemerged to "bargain hunt" for Asian gasoline barrels, with around 4-6 MR-sized tankers set to load gasoline in March, according to shipping sources.

In 2019, Mexico was the third largest buyer of gasoline from China, taking in 1.09 million mt of the motor fuel, a 48.5% jump from a year before, according to data from China's General Administration of Customs.

Meanwhile in a rare move, Japan's Idemitsu had also placed MR-tanker Nave Aquila for a Japan to US West Coast voyage, with an option to discharge in Hawaii as well.

GASOIL FINDS HOMES BUT OPPORTUNITY LIMITED

Like gasoline, gasoil cargoes have also flowed out of Asia, in light of a strong front-month Exchange of Futures for Swaps spread.

The EFS is the spread between Singapore front-month 10 ppm sulfur gasoil swaps and the corresponding ICE low sulfur gasoil futures contract, as well as an indicator of the viability of East/West arbitrage economics.

"There are some vessels still moving [West] despite the arb being shut for the majority of [gasoil] traders," a source with a Western trader said, adding that it was just a few Asia-based market participants who have been seen sending volumes.

Another source said that while the economics for such moves did not work on paper, it was seen to be a "least loss" option and possible for those with infrastructure in the West -- such as storage tanks in the Amsterdam-Rotterdam-Antwerp area -- readily available.

Unless they were holding a position from a long time ago, such as hedging activities "these [arbitrage] moves don't make sense, but sometimes it is a least-loss option... if they have refineries still running and production still coming out, they have to continue selling," a trader with a Singapore-based company said.

JET TRADERS MULL STORAGE

But while motor fuel markets have found outlets overseas, jet fuel – the hardest hit of the transportation fuels – face a closed arbitrage window, prompting traders to consider storage instead to capitalize on the cheaper, prompt jet fuel prices hoping to resell at a later date when prices go up.

Traders said reasonable storage fees of around 70 cents/b to 90 cents/b could incentivise them to keep the cheaper jet barrels in tanks until a time when jet fuel prices picks up . This comes as the jet fuel market has deepened in steep contango as a result of the coronavirus pandemic.

"Most importantly, there is simply nowhere for jet [fuel cargoes] to go, there is no other way but to store it," a market participant said.

Reflecting the growing surplus in Singapore, commercial onshore middle distillate stocks which includes gasoil, jet fuel and kerosene stock, in Asia's main trading hub rose to 12.32 million barrels in the week ended March 18, from 11.14 million barrels in the week prior.

"The arbitrage window was open to US but jet prices there has plunged too, it's quite unclear now," a market participant said.