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Asia's Q2 planned refinery maintenance to shut 65% more capacity versus Q1

Singapore — Planned maintenance at Asian refineries in the second quarter of this year is expected to shut 65% more regional operating capacities, as compared with the first-quarter, providing a floor for refining margins amid the decline in product supply, S&P Global Platts Analytics data showed Friday.

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The Q2 regional turnaround translates to a 2.8 million barrels/day loss in capacity, up from the 1.7 million b/d loss in Q1, the data showed.

However, continued demand destruction in the region and globally, caused by fears and the spread of the coronavirus, or COVID-19, may push regional refineries to make deeper run cuts to limit losses, industry sources said.

"2020 was supposed to be a good year for refiners due to the IMO 2020, but instead, it is shaping up to be much of the opposite," S&P Global Platts Analytics' senior analyst Alex Yap said. From the start of 2020, the International Maritime Organization capped the sulfur content in marine fuel to 0.5%, from 3.5% previously.

On a year-on-year basis, planned maintenance in Q2 saw refining capacity cuts climb 17% to 2.8 million b/d, up from 2.4 million b/d a year ago. Asia's spring turnaround season typically spans from March to June each year, with Asian refineries using this time to prepare for the seasonal increase in oil product demand during summer.

This period typically sees a shift in diesel and gasoline seasonal specifications, as well as a ramp up in jet fuel demand ahead of the spike in air travel during the summer holidays.

However, unlike previous years, the rapid outbreak of the coronavirus since December 2019 from China, has had a severe impact on oil demand, hitting the aviation sector and jet fuel demand significantly harder, as airline companies continue to halt flights on poor passenger demand.

The jet fuel crack spread against Platts cash Dubai crude assessments averaged $8.82/b in February, down by around 20% from the January average of around $11.10/b and December 2019 average of $12.85/b.

Other product cracks in Singapore fared better, with the gasoil crack spread against cash Dubai slipping 3.7% from January to average $11.75/b in February. Over the same period, the 92 RON gasoline crack spread rose 73% from January to $8.35/b, while naphtha cracks rose 180% from January to minus $1.05/b.

Crude oil futures, have not been spared either, as May ICE Brent settled $1.14/b lower to $49.99/b late Thursday, the lowest that the front-month Brent has settled at since July 24, 2017, as OPEC+ mulls production cuts.

On Thursday, OPEC revised its global oil demand growth down from December 2019's 1.1 million b/d to 0.48 million b/d in 2020 due to the rapid spread of COVID-19 in China.

"The COVID-19 outbreak has had a major adverse impact on global economic and oil demand forecasts in 2020, particularly for the first and second quarters," according to a statement on the OPEC website." Moreover, the unprecedented situation, and the ever-shifting market dynamics, means risks are skewed to the downside."

REFINERIES MULL OVER YIELD SHIFT, RUN CUTS TO STOP THE BLEEDING

The Singapore cracking margin against Dubai crude widened $2.68/b, or 112%, from January to average $5.69/b in February, Platts data showed.

The support came mainly from light distillates, given the lower run rates of secondary units in Asia, as refineries tried to limit their losses due to poor margins a month earlier.

"Outside of China, mainly export-oriented private refiners such as those in South Korea, Japan and Singapore would cut runs," Yap said. "Refineries of national oil companies in import markets such as Indonesia and Malaysia would likely not see substantial [refinery] cuts."

Platts margin data reflects the difference between a crude's netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.

In China, the volatility in oil product demand has pushed state-owned refineries to change their product slate by lifting gasoil yield at the expense of jet fuel output, while Japan resorts to short-term refinery shutdowns to control fuel stockpiles.

"With less traveling, less commute, less flights, less movements, refineries have to cut their runs," a North Asian refiner said. "With the [coronavirus] outbreak spreading rapidly in the West, the situation looks more serious [for the Asian refiner.]"