ANALYSIS: Asian middle distillate-rich crudes head south on poor margins, COVID-19 concerns

Price differentials for middle distillate-rich Malaysian and Vietnamese crude grades are expected to weaken in coming months amid an influx in supply of arbitrage barrels and weakening product margins as the resurgence of COVID-19 cases keeps a firm lid on product demand, sources told S&P Global Platts in the week of Aug. 3.

October loading Malaysian crude grades are expected to trade at premiums of around low-mid $2/b to Platts Dated Brent, FOB basis, a Malaysia-based crude trader said.

In comparison, September loading flagship crude cargoes from Malaysia including Kimanis and Labuan -- rich in middle distillate -- traded at premiums of around $3.7/b to Platts Dated Brent on a FOB basis, while September loading Vietnamese crude grades including Ruby, Bach Ho Light also traded at premiums of around high $3/b to Platts Dated Brent on a FOB basis in July.

August loading Malaysian and Vietnamese crudes had traded at premiums of around low-mid $3s/b to Platts Dated Brent on a FOB basis in June.

A Singapore-based crude trader said the strength seen in July is not expected to last.

"Market in August will be much much weaker with a lot of WAF [West African crude barrels] unsold in the market, plus China demand is not going to come back," the trader said. "The July loaders sailed east unsold," he added.

POOR MARGINS, REDUCED DEMAND

Demand concerns for middle distillate products including gasoil and jet fuel have grown amid the resurgences with the virus taking hold in countries which had early success in stamping out the disease and bringing it back under control, traders said.

"[My outlook is] bearish for now, " said a Singapore-based crude analyst. "Margins [are] not good, refinery runs [are] still reduced."

The second month jet fuel swap crack against Dubai swap averaged $2.47/b in July has averaged $1.45/b so far in August, according to Platts data.

"I think the jet fuel market as a whole will continue to be under pressure at least until the end of the year or longer, until a vaccine for COVID-19 is found," said a trading source said Aug. 6. "Right now, refiners have only 2 options when it comes to jet [fuel], either they minimize jet fuel output or blend it with gasoil."

MORE GASOIL SUPPLY

While gasoil is seen to be the more resilient fuel in the Asian middle distillate complex thanks to its varied applications in the transportation, agriculture, industrial and mining sectors, industry sources noted that the gasoil market was showing signs of weakening with declining Chinese demand dampened by floods and falling mobility and economic activity in India, South Korea, Japan and Australia.

S&P Global Platts Analytics had said in a report Aug. 3 that despite low run rates, refiners have been experiencing a period of soft demand and high inventories and "low margins are likely to persist."

Market participants said the anticipation of rising supply from major gasoil supplier China for August, added to length in the market, exerting downward pressure.

Gasoil traders said that while Asian gasoil sentiment has been the downtrend, the front-month EFS has managed to remain at relatively firm levels due to an even weaker European gasoil market. This has worked to limit Asian surplus barrels from flowing towards the West, further weighing on the Asian gasoil market.

"The EFS strength is mostly led by European weakness it seems, which are swinging prompt arbitrages back into the East, so that is adding to some of the pressure in Singapore, [which we are seeing in] the timespreads," a Singapore-based trader said.

While sources noted these bearish factors are poised to weigh on the Asian gasoil market, existing curtailed production at regional refineries could help to cushion the blow, limiting the downside and providing a floor for prices.

"Refiners already bought feed for their run for April and May while they realized the collapse in demand ... this time, refineries except China are at lower run compared with March-April," a gasoil trader said.

Platts Analytics said Aug. 3 in a report that India's refinery runs in the second half of 2020 are expected to be 260,000 b/d lower on the year as refiners hold back from raising throughput as demand recovery is likely to slow with many states having reimposed lockdowns to combat the spread of the coronavirus.

"India's oil demand is expected to be down on the year by 115,000 b/d over the second half of this year. Indian refiners are also reducing run rates as the export market is not attractive," Platts Analytics added.