Malaysian 10 ppm sulfur gasoil imports to remain elevated amid shortfall: sources

Singapore — Malaysia's nationwide switchover to using the Euro 5, or 10 ppm sulfur specification for gasoil from April 1 is expected to boost imports of the lower sulfur grade, industry sources said, as several domestic refiners are not able to meet the new specifications.

Traders, however, said that demand upside could be capped due to the COVID-induced movement restrictions.

Malaysia's previous gasoil standard had been the medium sulfur, or 500 ppm sulfur grade.

According to trade sources, the shortfall in domestic supply of the Euro 5 specification gasoil stems from the fact that several refiners are not yet able to meet the new ultra-low sulfur diesel standards.

S&P Global Platts reported in March 2020 that a fire at Malaysia's biggest refinery, the 300,000 b/d Refinery and Petrochemical Integrated Development, or RAPID, facility located in Johor, had affected its diesel hydrotreater unit, leaving the refinery unable to produce 10 ppm sulfur gasoil barrels pending repair and replacement works.

"With the RAPID complex not coming back until the latter half of this year, Malaysia may opt to import gasoil of Euro 5 standards to meet any shortfall in the transition," JY Lim, oil market adviser at S&P Global Platts Analytics said.

Market sources said April 12 there are at least two other domestic refiners heard unable to meet the new standards.

In the lead-up to the specification change, traders said Malaysia had been buying significant volumes of 10 ppm sulfur gasoil to flush pipelines and tanks in preparation.

Enterprise Singapore data showed a sharp jump in gasoil outflows heading to Malaysia in March, with exports totaling 810,207 mt, significantly higher than 165,176 mt in February.

Asian Gasoil

Industry sources said Malaysia's import requirements to plug its domestic ultra-low sulfur diesel, or ULSD, supply shortage will lend support to the Asian gasoil market which has been seeing stagnating demand and robust regional supplies, shored up primarily by Chinese export volumes.

Traders and analysts have estimated that March gasoil exports from China could reach an 11-month high of 2.29 million mt, or climb even higher to 2.6 million mt. For April, China's gasoil exports are being estimated at a slightly lower, but still high level of 2.45 million mt, Platts reported on March 29.

Adding to an already well-supplied market have been inflows of gasoil from India and the Persian Gulf, with these barrels attracted to Asia due to unviable arbitrage economics amid high freight rates as well as poor European demand. In addition, a strong Exchange of Futures for Swaps, or EFS, further worked to disincentivize East-West arbitrage moves.

At the Asian close April 9, the April EFS swap was assessed at minus $3.73/mt, widening from minus $2.30/mt assessed the day before.

Boosted by Malaysia's higher appetite for imports, the cash differential for the benchmark FOB Singapore 10 ppm sulfur gasoil jumped up 12 cents/b from April 5 to settle at minus 2 cents/b to the Mean of Platts Singapore gasoil assessments on April 9, its highest since Feb. 26, 2021, when it was assessed at plus 2 cents/b to MOPS gasoil assessments, Platts data showed.

COVID-19 controls

While Malaysia's gasoil imports have brought a welcome relief to a well-supplied Asian gasoil market by providing an outlet for surplus volumes to flow to, some industry sources said the imports have not been as much as expected.

"There have been some volumes going there [to Malaysia], but I wouldn't say it's big volumes... with the [COVID-19] movement restrictions still in place, demand hasn't been so good," a trader with a Western company said.

Local media have reported that most states are on a Conditional Movement Control Order, which stipulates that while most economic sectors and businesses are allowed to operate, strict restrictions on social distancing measures still have to be observed.

In addition, large public gatherings involving community, religious or sporting events are still banned, as so is travel between states.

Industry sources cautioned that the situation is still fluid, and that stricter regulations could be reimposed if the country fails to contain the coronavirus outbreak. On April 11, Malaysia's Health Ministry reported a jump in COVID-19 infections to 1,854, up from 1,510 cases the previous day, with the bulk of infections contributed by large gatherings and events.