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Future dims for Middle East refiners amid worsening Q2 outlook

Singapore — Refiners in the Middle East are expected to face mounting pressures in the second-quarter of the year, with product cash differentials likely to extend their downward trend as the region suffers a double whammy of faltering consumer fuel demand and oversupply, following the end of an extensive refinery turnaround season.

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The bearishness comes as the coronavirus, or COVID-19, has continued to spread rampantly across the region, an issue that has rocked the global economy, equity and commodity markets.

Saudi Arabia, the hardest hit of the Gulf Cooperation Council, or GCC states with 900 cases as of early Thursday, has locked down three cities and tightened curfews, joining fellow GCC member Kuwait, which announced a two-week public holiday from March 12, after suspending all international flights, except cargo carriers.

UAE's national carrier Ethihad Airways also announced earlier this week a temporary 14-day suspension of all passenger flights top, from and via Abu Dhabi with effect from Thursday, March 26.

Emirate Airlines mirrored the move and also announced a temporary two-weeks suspension of all passenger flights which took effect from Wednesday, March 25.

With people staying home and businesses shut, this has translated to feeble demand for refined oil products, with gasoline and gasoil the hardest hit in line with a sharp slowdown in driving activity.

According to latest S&P Global Platts Analytics estimates, oil product demand in the Middle East is forecast to fall 0.6% year on year to average 9.7 million b/d in the first half of this year, with full year 2020 total oil product demand also likely drop by 0.2% year on year.

"Demand [in the Persian Gulf] is slowly fizzling out," one market source with a Middle East company said. "Schools are out and there is hardly much driving. It will take time for things to return back to normal."

TURNAROUND SEASON ENDING

While demand in the region has fallen, supply is expected to steadily increase with refineries ramping up run rates following months of turnaround.

In the UAE, maintenance works have been completed at Emirates National Oil Company, or ENOC's 140,000 b/d Jebel Ali Refinery, while state-owned Kuwait National Petroleum Co. is also poised to bring its 122,000 b/d No. 5 CDU at its 466,000 b/d Mina Al-Ahmadi refinery back from a two-month long scheduled turnaround, Platts reported earlier.

Persian Gulf refiners usually bring their units under maintenance over the first quarter of the year, in preparation for the peak second-quarter demand season that stretches over the hot summer months and also covers requirements for the Muslim holy month of Ramadan.

But gasoline, gasoil and jet demand during Ramadan -- which typically sees a significant rise in travel patterns -- is expected to fall, with Saudi Arabia halting travel to its pilgrimage sites over COVID-19 fears.

"The Persian Gulf was short with regard to gasoline in the first quarter," a second source said. "With the TA season ending, we are expecting heavier supply."

Exacerbating the supply-side outlook, restrictions on travel have led to manpower issues, forcing some like Bahrain Petroleum Co and Saudi Aramco to postpone their scheduled turnarounds at their respective 267,000 b/d Sitra and 550,000 b/d Ras Tanura facilities.

MIDDLE EAST TRACING GLOBAL ROUT

With a diverging demand-supply dynamic moving forward, premiums and cash differentials for cargoes from the Middle East are expected to remain lackluster.

Cash differentials for gasoline cargoes in the Persian Gulf have already plunged to multi-month lows with the premium against the Mean of Platts Arab Gulf 92 RON gasoline assessments falling to $2.55/b as of close of Asian trade Wednesday.

The differential was last lower on February 15, 2019 at $2.5/b, Platts data showed.

Over in the gasoil market, the assessed cash differential for 10 ppm sulfur gasoil cargoes loading from the Persian Gulf fell to an eight-month low of plus $1/b to the Mean of Platts Arab Gulf gasoil assessments at the Asian close on Wednesday.

Market participants even said this week that a recent spot tender to sell a 10 ppm sulfur gasoil cargo from Kuwait Petroleum Corporation was sold to an unconfirmed buyer at a premium of around 30-50 cents/b to MOPAG gasoil assessments, FOB. That 40,000 mt cargo is to load over April 15-16.

"It is what it is," a Persian Gulf-based refiner said late Wednesday. "There's still a lot of jet that is being converted to diesel and we see a lot of diesel coming everywhere."

Another refining source said on Wednesday that there were not many deals in the Persian Gulf region as people tried to ease through the current challenges and the jet fuel market just looked very weak at the moment.

The cash differential for jet fuel cargoes loading from the Persian Gulf fell to a 17-month low of plus 80 cents/b to the Mean of Platts Arab Gulf jet fuel/kerosene assessments at the Asian close on Wednesday. The last time the cash differential was assessed lower was on October 9, 2018, at plus 75 cents, Platts data showed.