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Asian refiners shrug off crude allocation cuts as focus turns to surplus oil products

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Asian refiners shrug off crude allocation cuts as focus turns to surplus oil products

Highlights

Feedstock requirement limited amid low fuel output plans

Fuel exporters find international sales difficult amid fragile demand

Market backwardation works against higher inventory

Singapore — Asian refiners have been consistently receiving less Middle Eastern term crude barrels than their original contractual volumes but the companies are broadly unscathed by the limited OPEC feedstock supply as they pay more attention to managing oil products inventory at a time when consumer fuel demand remains extremely fragile.

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Refiners in the key Asian economies of India, China, Japan and South Korea have once again received crude term allocation cuts from Saudi Arabia, mostly ranging between 2%-10% for March-loading barrels, according to multiple refinery trading sources across Northeast and South Asia surveyed by S&P Global Platts.

The cut reflects OPEC's strong commitment to curb supply through the first quarter, with Saudi Arabia reducing its production voluntarily by an additional 1 million b/d till March. Abu Dhabi National Oil Co has also informed its Asian term customers nominations across all four of its crude oil grades will be reduced by 10%-20% for March, Platts reported earlier.

However, Asian refinery sources said feedstock procurement is no longer the main agenda as the companies are more concerned about a build-up in unwanted oil products inventory, with the ongoing movement restriction measures and tepid economic activities keeping any consumer fuel demand recovery in check.

"Asian traders and refiners have learnt their lessons in 2020 ... once you start accumulating surplus fuel stocks, it's very very difficult to clear them because it's not just the domestic demand that's suffering, international buyers are reluctant to buy as well in times like this," said a middle distillates marketing manager at India's BPCL.

The OPEC crude production and term allocation cuts wouldn't exactly set an alarm bell for Chinese refineries because the country has secured ample feedstock reserves and stockpiles last year ... China is expected to produce less oil products in the early half of 2021 anyway due to the tepid domestic consumption trend," said a feedstock trading source at state-run PetroChina.

China is expected to produce on average 906,000 b/d of jet fuel in the first half of 2021, a slight increase from the 853,000 b/d average produced in 2020, but significantly lower than 1.12 million b/d in 2019, according to S&P Global Platts Analytics data. Gasoline output is expected to average 3.67 million b/d in H1 2021, down 1.3% from 3.72 million b/d in 2019.

China, S Korea inventory management

Chinese and South Korean refiners said any fresh accumulation in unwanted fuel inventory as a result of tepid domestic consumption would be difficult to control because of the weak Asian exports market outlook.

Chinese refiners said their jet fuel inventories were surging as demand slumped during spring travel rush period due to the governments' call for celebrating Lunar New Year locally instead of the mass population traveling back to home town. In addition, a source with Norinco Huajin said the refinery has to cut gasoil stocks during Lunar New Year holiday, when demand from the industrial and transportation sectors will be low.

In an effort to clear any increase in surplus inventory, Chinese refiners plan to boost gasoil exports in February to above 2 million mt. However, the current fragile demand landscape across Asia could mean that China's February exports could fall short of its monthly international sales target.

Major transportation fuel importers in Southeast Asia have been cutting back on spot and term cargo purchases with Myanmar's political crisis causing logistical constraints and drastically slowing down the country's gasoline intake, while demand remains sluggish in Indonesia, Malaysia and Vietnam, Asian middle distillate traders and marketers said.

Accordingly, South Korean refiners have lowered their oil product exports guidance for 2021.

South Korea, one of Asia's top middle distillate suppliers, is expected to export around 74 million barrels of gasoline, jet fuel and diesel combined in H1 2021, down 27% from 101.93 million barrels exported a year earlier, according to fuel marketing sources at three major South Korean refiners surveyed by Platts.

Market backwardation

The recent Asian refined products market structure also doesn't bode well for any refiners holding excess fuel stockpiles, with the Asian gasoline price forward curve moving into backwardation in recent weeks.

A backwardation in the crude market structure represents lower prices for forward month contracts than the current spot price, hence discouraging trading firms and refiners to accumulate or store oil for later use.

"A build-up in surplus, unwanted fuel stocks in 2020 was more or less manageable as long as one can find enough storage because of the steep contango market structure, but storage play is something to avoid when the structure flips," said a market analyst at Korea Petroleum Association based in Seoul.

The front and second month FOB Singapore 92 RON gasoline swap timespread averaged 8 cents/b to date in February, compared with the January average of minus 17 cents/b and 2020 average of minus 39 cents/b, Platts data showed.

S&P Global Platts 8th Asian Refining Summit | March 4, 2021

What does the new normal hold for Asian refiners? Gain access to industry leaders who will share their views on how the refining landscape is shifting and the sector is adapting.

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