Asian transport fuel demand in for slow recovery despite vaccine hopes: sources

A recent string of bullish vaccine announcements have provided much-needed boost to the Asian transportation fuel markets, with prices across the barrel seen pushing through resistance levels in recent months. But with countries in the region moving ahead in lifting trans-border restrictions even as COVID-19 infections continue to rise, industry sources told S&P Global Platts that the upside could be temporary -- especially in the first half of 2021 -- as mass vaccination programs are gradually rolled out.

"It will take some time to get a critical mass vaccinated. Our baseline assumption considers that the vaccines' effects on economic activity everywhere will start to become apparent in the latter part of 2021," said Lim Jit Yang, adviser for oil markets at S&P Global Platts Analytics.

Industry sources said they were skeptical of spikes seen in recent days for near-term market fundamentals, adding that improvements, if any, would only become apparent over a longer time period. Still, bullish sentiment has been characterizing the Asian transportation fuels market over the past week, with the gains coming in tandem with the rollout of the Pfizer-BioNTech COVID-19 vaccine first in Britain, followed by the US.

The Asian gasoil complex flipped into a backwardation for the first time in four months on Dec. 9, while the physical FOB Singapore 10 ppm sulfur gasoil crack to front-month cash Dubai rose to its highest in over three months on the same day, finishing the Asian trading session at $5.80/b. At the 0830 GMT Asian close Dec. 15, the crack stood at $5.71/b.

"The road to recovery will be a gradual one given that the entire population can't be given the the vaccine at one shot, but in batches," a Singapore-based refining source said Dec. 15. "For jet fuel [in Singapore], if you factor in the air travel bubble and corridors with other nations like Hong Kong and Taiwan, the improvements will definitely be more significant,"

Meanwhile, the physical FOB Singapore jet fuel/kerosene cash differential flipped into premium territory for the first time in over nine months on Dec. 4, closing the Asian trading session at plus 7 cents/b to the Mean of Platts Singapore jet fuel/kerosene assessment. Platts data showed that jet fuel was last assessed at a premium on Feb. 28, at MOPS plus 1 cent/b. The cash differential, however, reverted to a discount on Dec. 8, and at the 0830 GMT Asian close Dec. 15, it registered at MOPS minus 15 cents/b.

Jet fuel struggles to take off

Traders said underlying long-term fundamentals for aviation fuels have actually remained largely unchanged amid strict border controls, rigid travel requirements and poor consumer confidence.

According to a recent report by the International Air Transport Association on Dec. 8, the recovery of global air passenger demand continues to be "disappointingly slow", adding that while the pace of recovery is faster in some regions than others, the "overall picture for international travel is grim".

Asia's better performance in dealing with the pandemic will pave the way for economic growth, and thereby oil demand recovery in 2021 with demand for gasoline and gasoil is expected to bounce back in 2021, but jet fuel demand will remain lower as airlines are likely to continue to function well below capacity next year, especially for international flights, Lim said.

Gasoline faces headwind

Likewise, the road to recovery for Asian gasoline is seen to be a lengthy one, with major importers such as Malaysia and Indonesia yet to keep current infections fully under control, industry sources said.

Market participants said that steady, long-term outlets for gasoline barrels, which will only come with the return of consumer confidence and the loosening of coronavirus-related restrictions, remain a distant hope for the moment.

"It is still a far way off. Logistically it is going to take a lot of time to get the vaccines out there," one Singapore-based source said.

Agreeing, a second source said that "without strong buying from Southeast Asia, the [gasoline] market will still find it difficult to absorb the rising amount of Chinese barrels in the market [in 2021]".

Gasoil sentiment steady but seen moderating

While the Asian gasoil market has seen marked improvement since second-half November -- aided by steady demand in Southeast Asia and expectations of higher imports from India and Africa -- some market participants said demand remains volatile against a backdrop of escalating infections being reported in North and Southeast Asia, with this giving rise to an uneven pace of trade.

This has been evidenced by the Asian gasoil complex flip-flopping between a backwardation and contango structure since Dec. 9.

"For gasoil/diesel, demand, in general, is still volatile, and on the supply side, while North Asian refiners have been running at lower rates, because of the regrade over the past one-two months, refiners have been heard minimizing jet [production] and optimizing gasoil/light cycle oil exports," a refinery source said, adding that it is "not always easy to reach a balance" in the current market situation.