Asia's fuel consumption has picked up since the peak of the COVID-19 pandemic during March-April, but the region's oil product producers and importers remain keen to adjust their trading strategies as demand recovery remains fragile, with buyers tightening their term purchases, while suppliers keep a lid on output volumes.
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Asian refined oil markets have so far registered wild swings in both physical cargo trading volumes and benchmark prices over the past several trading cycles and industry participants have had to re-think deal structures as well as requirements, particularly in the face of limited storage and an uncertain demand recovery outlook.
"Fuel demand has certainly staged a sharp rebound with economic activities resuming amid easing lockdown measures across Asia. But without the complete remedy to end this current pandemic, the demand recovery outlook is always questionable so fuel producers and buyers are both cautious not to overcommit," a Seoul-based Korea Petroleum Association official said.
Reflecting the lingering demand recovery uncertainty, the South Korean petrochemical sector would continue to seek ways to renegotiate their term naphtha purchase volumes, feedstock trading managers at Hanwha Total and Lotte Chemical said.
Similar sentiment was seen over in India. B. Anand, CEO of Nayara Energy, told S&P Global Platts that while there is an uptick in demand for petroleum products, the company remains cautious in the near term.
"We are optimizing our crude mix to accommodate the changing market conditions. On the product side, we are [focused on] maximizing domestic sales [rather than exports]," Anand said.
FRAGILE DEMAND RECOVERY
Uncertainties continue to surround the pace of which regional demand for transportation fuels is set to recover, especially in the face of a potential second wave of coronavirus.
China saw its domestic demand for gasoil and gasoline return to near pre-lockdown levels by May. However, state-run and independent refiners remain cautious not to tilt the supply-demand balance as the market is slated to face demand headwinds with Beijing undergoing lockdown again, industry officials based in Beijing and Shandong province said.
The recent uptrend in China's refinery run rates has outpaced the domestic fuel demand recovery. Surplus runs should be closely monitored since it would lead to continued oil product stockbuilds at both refinery and wholesale level, according to S&P Global Platts China Analytics.
Likewise in other parts of Asia, new coronavirus cases have popped up in countries which that have lifted movement restrictions such as South Korea, Australia and Thailand.
These countries were deemed "successful" in tackling the coronavirus spread but the rise of new cases adds to the uncertainties of how fast consumers will be ready to hit the streets again.
South Korea's domestic gasoline demand rebounded to 7.81 million barrels in May from 6.58 million barrels in April and 5.79 million barrels in March. However, the monthly motor fuel consumption is unlikely to recover above 8.2 million barrels as long as the pandemic persists, according to traders and fuel marketing sources at major South Korean refiners SK Innovation, S-Oil Corp., GS Caltex and Hyundai Oilbank surveyed by S&P Global Platts.
Adapting to the uncertain demand outlook, major Southeast Asian oil importers have also started to shorten term contracts in favor of more spot cargoes, ensuring short term flexibility in their purchases.
Indonesian state-owned Pertamina for example, recently shortened its usually half-yearly term gasoline contract to quarterly commitments, allowing the company to respond to changes in domestic consumption trend.
REFINERS KEEP OUTPUT IN CHECK
The need to ensure flexibility has also had an impact on the supply side, with refiners broadening their strategies to ensure efficient supply management
Japanese refiners have turned toward importing gasoline, as opposed to producing it themselves, amid a buildup in stocks of middle distillates, of which jet fuel has little demand given muted global travel.
Middle distillate output accounts for an estimated 40% of Japanese refining capacity, with light distillates making up a smaller estimated 20%, several sources with knowledge of Japanese refining sector output said.
New Zealand's Refining NZ, who runs the country's sole Marsden Point refinery, similarly echoed a shift toward this strategy in April, when it announced the start of a "Strategic Review," which could see the country turn into a net importer of oil products.
Meanwhile, other Asian refiners have also increased their focus on markets they hold a comparative advantage in, industry sources said.
Eyes on this front lie with South Korean refineries, which are expected to raise fuel exports to Vietnam in coming months as the latter increases spot purchases amid ongoing domestic refinery turnarounds.
South Korean refiners typically favor supplying directly to Vietnam due to a free-trade agreement known as the form KV agreement between the two countries.