Asian gasoline to ride a volatile winter with COVID-19 in the driver's seat

Volatility is expected to increase in the Asian gasoline market this winter as developments surrounding COVID-19 remain the main driver, while the typical seasonal weakness that the motor fuel market suffers from with the approach of winter in the northern hemisphere takes a backseat.

Although the central, overriding theme for most of this year has been the COVID-19 pandemic, a confluence of bullish and bearish factors during the winter of 2020 suggests that market participants will put December in greater focus to evaluate the future for the motor fuel complex in 2021.

Eyes will remain fixed on how the COVID-19 vaccine will impact the market, especially after Oxford-AstraZeneca, Pfizer and BioNTech, among others, have announced positive developments in various vaccine trials in November.

"Next step is distribution and whether these vaccine producers can get it out to the mass market fast," one Singapore-based source said.

Demonstrating the impact of this optimism, the FOB Singapore 92 RON gasoline crack spread against front-month ICE Brent crude futures jumped 20.5% on the day at the Nov. 18 Asian close, in reaction to news that Pfizer and BioNTech's vaccine was 95% effective, market sources added.

Bears, on the other hand, point to the surge in new cases amid a fresh wave of COVID-19 infections, which continue to pummel near-term gasoline demand.

Both Malaysia and Indonesia, major importers of gasoline in Asia, hit new milestones in COVID-19 infections last week as the total number of COVID-19 cases in Indonesia surpassed the 500,000 mark on Nov. 23, while Malaysia reported a record 2,188 cases on the same day.

These milestones have been overshadowed by the rising number of cases in the US, which faces another possible crisis as people travel back home for the holidays amid the pandemic.

"We are seeing themes on both ends. The reality is that demand isn't that great yet and could even get worse. Hong Kong, Japan, Indonesia just to name a few are seeing more cases," one Singapore-based market source said.

Through 2020, Asia's gasoline market has experienced heightened volatility due to the COVID-19 pandemic as the standard deviation -- a statistical measure for volatility -- for the FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude futures stands at 4.05, up from the 3.24 in 2019, Platts calculations showed.

Volatility has remained high in Q4 as well, with the physical crack sinking 30.1% day on day to a 15-week low to $1.06/b at the close of Asian trade on Nov. 23, only to bounce back up by 33% the next trading session to $1.41/b.

The same is also true for gasoline timespreads, as the Month 1-Month 2 92 RON gasoline swap spread demonstrated similar volatility -- strengthening to a backwardated structure of 7 cents/b for the first time in almost a month on Oct. 30, only to dive deep into a 30 cents/b contango the next trading day.

WINTER-WEAKNESS SIDELINED

With COVID-19 still in the driver's seat, the Asian gasoline market has shrugged aside the seasonal winter-weakness.

The Northern Hemisphere winter typically places pressure on Asia's gasoline market due to a combination of lower driving activity as well as the availability of cheaper winter-grade gasoline.

"With a longer than normal hurricane season, lower driving even during an election year, and with [the] COVID [pandemic]. The market has already priced in bad demand across the US," the second market source said.

US gasoline demand has been declining as a resurgence of coronavirus cases have led to partial shutdowns and lower personal mobility in many regions. Apple Mobility data also showed US driving activity in the week ended Nov. 20 at its lowest since mid-May.

To that end, the US RBOB-Brent crack, which Asian gasoline crack spreads closely trace, inched slightly lower to an average of $6.21/b over October to November, down from the $8.31/b in the third quarter.

In 2019, the US RBOB-Brent crack narrowed sharply from an average of $10.61/b in the third quarter to an average of $6.67/b in Q4.