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Speaker 1:

Hello, and welcome to the Platts Commodities Focus podcast by S&P Global Commodity Insights, where today, we're deep diving into the evolving landscape of gasoline pricing and supply in Asia. In today's episode, we will explore the recent developments surrounding Malaysia's subsidy plan for higher octane 95 RON gasoline, and its potential impact on regional demand. As we unpack the complexities of this subsidy, we'll also address the challenges Malaysia faces in transitioning to cleaner fuels, particularly with the upcoming shift to Euro 5 standards. We'll explore the intricate interplay between domestic consumption, import dependencies, and the geopolitical factors influencing the gasoline markets, including Indonesia's strategic pivot away from Singapore.

My name is Jensen Ong, Market Engagement Lead for global refined oil products, and I am joined by Joshua Ong, Senior Price Reporter for APPEC light ends, and Rachelle Teo, Associate Price Reporter for APPEC middle distillates. To begin, Joshua, can you provide us with an overview of the current trends in the benchmark FOB Singapore gasoline market? Because we understand that there's been some developments, the markets that has pushed up some of the [inaudible 00:01:18] prices as well. So just wanted to hear a bit more on some of the current trends in the market.

Speaker 2:

Certainly, Jensen. The Asian gasoline market has been seen strengthening in mid-August, with the cracks rebounding from about the sub-a dollar per barrel level, to around $10 per barrel. This sudden increase or widening of the crack could have been due to some policy changes in the region that have impacted demand trends significantly as a demand for low-sulfur blend stocks, as well as higher-octane gasoline and their respective components could possibly see a rise in demand.

Speaker 1:

Right. Thanks, Joshua. So cracks strengthening throughout mid-August. So just want to zoom in and focus a bit on the non-oxygenated low-sulfur blend stocks first. So what's driving the increase in this segment of the market?

Speaker 2:

For that, I believe we should look at Australia. Australia is one of the larger users of non-oxy gasoline in the region, and Australia is more or less set to actually reduce the maximum sulfur quantity of domestic gasoline grades to about 10 ppm, which is quite a large reduction. So because of this, Australia is possibly seeking out... And what we've been hearing from the market is that Australia is possibly seeking out low-sulfur, non-oxy components summer driving season, where historically, Australia's domestic demand for gasoline usually rises quite significantly. So all this combined together is possibly pushing up demand for low-sulfur blend stocks. And what we've been hearing from sources is that even in the Middle East, there has been more demand for low-sulfur materials, and there has been some tightness in this regard.

Speaker 1:

Right. I see. And Rachelle, so as you mentioned, a lot of the policy changes in the region are driving the gasoline market. So besides Australia, we also note that Malaysia is also a big buyer in the region as well, and we mentioned earlier as well there's changes potentially upcoming in the subsidy plans, and also a few standards. So just want to hear more as to what are the policy changes in this region is affecting the market as well?

Speaker 3:

Yeah, of course. So if you look at the physical interim spreads, which is the price difference between the higher octane 95 RON and 92 RON gasoline, it's currently actually at an over seven-month high. So it's basically the highest it's been this year, and this could be due to Malaysia's subsidy increase for the 95 RON gasoline. And this is of particular interest, because Malaysia is the region's second-largest buyer, and the predominantly I import 95 RON gasoline. So the government had announced that they're going to lower the country's retail 95 RON gasoline prices by about six cents per liter, with details to be announced end September. And then right after the announcement, we saw traded volumes for interim swaps on the Intercontinental Exchange go from zero to 440 million barrels.

So on the derivatives market, the paper [inaudible 00:03:57] has also widened to a near six-month high, and the market has shared with us that they tend to see more activity on the paper market when the physical market grows more volatile. So we're seeing a lot of trading activity, because people will naturally expect lower retail gasoline prices to come to more demand for the product. And this precise expectation for the increase in consumption contributed to the market volatility for market participants.

So interestingly enough, open interest in the paper [inaudible 00:04:21] spreads on the Intercontinental Exchange have also increased with contracts from September to December this year seeing an uptake in interest by almost 2.5 million barrels since the announcement. So what this means is that more people are putting in positions for these contracts, demonstrating a higher interest level as the market is becoming more liquid.

So the latest data showed that traded volumes have since risen to almost 800,000 barrels, all likely on the back of an expected rise in demand for the 95 RON. Still, with all of that, some market participants we've spoken to expect the rise in demand for the higher octane 95 RON gasoline in Malaysia to be moderated due to already low prices. So some find a six cents per liter decrease in Malaysian Ringgit not all that much in totality. Also, if the subsidies are coming into fruition by end September, Malaysia should be importing finished 95 RON low-sulfur gasoline now. So far, we've not heard much on that front.

Speaker 1:

Thanks, Rachelle. So I see the Malaysia's subsidy plan has increased quite a bit of activity on the [inaudible 00:05:15] spread as well as on interest into 95 RON gasoline as well. So in terms of policies that Malaysia has as well, we're aware that Malaysia is also aiming to transition to the 10 ppm sulfur content, and also to reduce lead content for the gasoline imported. So what challenges do you anticipate in terms of achieving these targets? And how might this affect the markets for gasoline itself?

Speaker 3:

So some sources have actually reflected that increasing subsidies for the 95 RON could make it more difficult for Malaysia to transition to the Euro 5 standard gasoline by 2027, September, as planned, and they're currently doing that in phases. So some market participants have reservations about the feasibility of subsidizing the 95 RON, while also paying the premium for importing a higher quality gasoline. But some of this also don't foresee the lower retail 95 RON gasoline prices slowing down Malaysia's timeline to reduce the sulfur content in the gasoline. Some say it's just a matter of tweaking refinery specifications, so the [inaudible 00:06:08] move towards the Euro 5 standard could simply proceed as planned.

Speaker 1:

Thanks, Rachelle. So I see Malaysia currently has two big plans. They're upcoming in terms of changing in terms of the gasoline specs, potentially moving to Euro 5 standards, and also changes in the subsidy plans, so quite a bit going on in this major market in this Asian region. So in terms of the non-oxygenated gasoline market, we were also hearing some interesting things going on in this market in terms of upcoming changes to specifications toward the end of the year as well, which Joshua mentioned earlier. So Joshua, I just want to understand a bit more about what's going on there, what might happen when this comes into play toward the end of the year?

Speaker 2:

Oh. Certainly, Jensen. So basically I think what I've explained to you earlier was more about the demand side, I think now we can really delve a bit more into the supply side of things. So I mentioned earlier that Middle Eastern supplies of non-oxygenated low-sulfur were tight, maybe what we can look at now is also the fact that there could be some decrease in Indian exports of gasoline, not least because of certain developments regarding the U.S. threat of tariffs on India that are an increase of 25% that was threatened in August due to India buying Russian crude.

Now certain Indian companies do buy Russian crude as it's cheap, and this is the feedstock that it used to produce non-oxy gasoline and components. One such company, of course, is Nayara, and what we have been hearing has not released as many tenders in recent months as they normally would. Normally, Nayara would sell 91 RON non-oxy gasoline, or other RON grades of non-oxy gasoline, but recently, we haven't been seeing that much sell activity coming from them. So of course this is a concern, because if there's less non-oxy gasoline coming out of India, then we could see the supply potentially falling, and this could also add to gasoline prices.

But on the flip side also, we have to understand that India doesn't buy all its crude from Russia, it does have many options when it comes to where it wants to buy its crude. And obviously while the state refiners like IOC and all that have been observed to cut down, at least reduce their buying of Russian crude as shown by local media. We do not know how this development will overall affect the exports from India in the long run, as this is still a developing story.

Speaker 1:

Thanks, Joshua. So we do see quite a lot of intricate links between diversification of supply in terms of how these are big buyers of, let's say non-oxy gasoline, are they able to diversify away? I think that's still a question in the market, because of how there may not be enough suppliers, or their usual suppliers may not be able to supply them products that are non-sanctioned. So I think there's some questions that is going around this as well.

Speaking of supply diversification, I think we also want to touch on the biggest buyer of gasoline in the region itself, which is Indonesia. And then understand there's some talks of Indonesia trying to look for new suppliers, or diversifying supply away from Singapore to meet their demand for gasoline. So could you share some insights on this development, as well as to why this is happening, what's going on, and what the market could expect moving forward?

Speaker 2:

Obviously we can't talk about Asian gasoline prices, or Asian gasoline at all without talking about Indonesia, which is the biggest buyer in the region. Even just for September alone, they expected to import 10 million barrels of gasoline. This is stable on month from August, but this is a truly very large amount. As Rachelle has mentioned earlier, Malaysia is the second-biggest buyer, and Indonesia is the largest. So in relation to what you pointed out earlier, yes, Indonesia is actually seeking to look for new suppliers outside of Singapore, and we have seen this in recent tenders, that they have actually restricted the origin of certain cargoes. How much they have actually bought from other countries, how much Singaporean gasoline they've actually replaced with other exports still remains to be seen. I think we are still looking into that. But overall, I think in the immediate term, there are plans by Indonesia to build 17 modular refineries, which will import U.S. crude, and thus the production of gasoline would increase domestically, and you would expect that they would buy less.

All these things, however, are still in the works. And when you talk about the immediate impact on the gasoline market, what we need to look at now is how much they're buying in the near-term. And in the near-term, Indonesia is very much expected to keep these gasoline imports stable. Maybe moving forward into the next few years, we may start to see some decrease in imports, but as of now, the demand seems to be stable on that front.

Speaker 1:

Thank you, Joshua. So quite a lot of dynamic changes across the markets, whether it's Australia, Malaysia, Indonesia, or even let's say in terms of grades, non-oxy, subsidy plans, policies in terms of diversification away. So we have a lot of insights from this podcast today. I just want to know, Joshua and Rachelle, both of you, if any key takeaways for our listeners today, what will you be highlighting? One thing, maybe perhaps for the evolving landscape of the gasoline market.

Speaker 3:

So just most notably on the derivatives side, we're definitely seeing more interest in the 95 RON gasoline via uptick in activity on the interim spreads. So we're continuing to monitor that, and we look forward to the market's reaction when more details on the Malaysian gasoline subsidies are eventually released.

Speaker 2:

So just to add to that also, I know we discussed a lot about policy changes in the region by Indonesia, and as well as some of the export partners like India, but I think maybe something that I would just like to add is also that we also to very closely watch another key player in the region, which is China. China exports quite a bit of gasoline every month, and as of now, I think China is set to export around 600,000 metric tons of gasoline in September. However, one thing that the market is watching very closely on the supply side is whether China may release a new export quota. So China basically has to limit exports in line with export quotas, which are actually issued by the government. As of now, the Chinese government is expected to maybe release another export quota by late August perhaps, but the market is still anticipating whether or not Chinese exports could increase. So this is something that I would say we should also watch, and is a relevant factor for the gasoline market.

Speaker 1:

I see. Thank you. Thank you, Joshua and Rachelle as well. A very exciting time in terms of the Asia gasoline space on the back of policy changes, supply diversification, and also fuel quality transition plans in the region. So we look forward to meeting you, our market participants and listeners at the most anticipated event in the energy industry, APPEC 2025 here in Singapore. So thank you very much, Joshua and Rachelle, for joining me in this conversation, and of course, thank you for listening.