Asian gasoil complex firms on supply concerns following Taiwan Formosa fire

Singapore — Tightening supply in the Asian gasoil market has lifted the middle distillate complex, with traders citing the fire at a unit of Taiwan Formosa Petrochemical Corp.'s 540,000 b/d Mailiao facility as the latest factor to have added to the bullish sentiment.

The firmer sentiment was reflected in the sharply steeper backwardation for the front month 10 ppm sulfur gasoil derivative timespread, with market participants noting that the spread started widening soon after news of the fire broke on the morning of July 15. At the 0830 GMT Asian close July 15, Platts had assessed the front month August-September gasoil timespread at plus 27 cents/b, a near fourfold increase from the plus 8 cents/b assessed at the close of Asian trading on July 14.

A Formosa Petrochemical Corp. spokeswoman said July 16 that the fire -- which occurred at the refinery's 80,000 b/d residue desulfurizer unit -- is currently under investigation. The spokeswoman added that it has not been decided how long the RDS unit -- which removes sulfur from crude oil -- will remain shut, or when it will be restarted.

GASOIL SENTIMENT FIRMS ON SUPPLY CONCERNS

Multiple trading sources attributed the strong upward push on the August-September timespread to the fire that knocked out Formosa's RDS unit, saying the incident would be yet another factor adding to the prevailing tightness in regional gasoil supply balances.

"It's a bullish development for gasoil and their [Formosa's] exports, especially their term [gasoil] cargoes, are expected to be affected," a source with a European trading house said, adding that Formosa has not offered any spot gasoil volumes recently as the refinery was running at reduced rates prior to the incident.

"What remains unknown is what China's August export volumes [of gasoil] will be like," he said, referring to market uncertainty over China's gasoil outflows for August, which is widely expected to have an impact on regional supply balances.

"But for now, the impact [of the fire at Formosa's RDS unit] is bullish," he said, noting that the front month Asian gasoil timespread strengthened quickly following the news.

Another industry participant agreed, saying the Formosa incident would heighten the already short gasoil supply situation in Asia as many regional refineries have reduced their operating rates and idled units following the demand destruction wrought by the COVID-19 pandemic, which left refinery margins at current lows.

"As it is, there are very few cargoes from North Asian suppliers... South Korea and Japan don't have much supplies due to low run rates there as well," the Singapore-based trader said.

REFINERY RUN RATE SEEN LOWER

Prior to the fire, Formosa was reportedly operating its three crude distillation units at an average utilization rate of 440,000 b/d, or around 80% of overall capacity, as refined oil product margins are still weak, Platts reported earlier.

Another source close to the matter said on July 15 that due to the fire, the refinery run rate will likely be lowered to just above 60%. This, however, could not be confirmed with Formosa on July 16.

The No. 2 CDU was last reported to have restarted over May 8-10 after two months of scheduled maintenance.

Formosa produces 10 ppm and 500 ppm sulfur gasoil grades, with volumes usually sold on both term and spot basis. In November 2019, Platts reported that the refiner awarded its annual 10 ppm sulfur gasoil term cargoes for 2020 at prices ranging from minus 25 cents/b to parity to the Mean of Platts Singapore gasoil 10 ppm sulfur assessments -- a drop from the 15-25 cents/b premiums settled for its 2019 term contracts.

Formosa's 500 ppm sulfur gasoil term contract for 2020 was awarded at a discount of 55-75 cents/b to the MOPS gasoil 10 ppm sulfur assessments, also below the MOPS 10 ppm gasoil minus 50 cents/b it got for its 2019 term cargoes.

Both the 10 ppm and 500 ppm sulfur gasoil term cycles run over January 1-Dec. 31, 2020, with 300,000 barrels of each grade available for lifting per quarter.