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Asian transport fuels face headwinds as second COVID-19 wave cases rise

Highlights

Rising COVID-19 cases to trigger new lockdowns

2020 transport fuel demand to stay muted

Cuts to regional output to help buoy fundamentals

Singapore — The surge in the second wave of coronavirus cases across Asia and Oceania has injected fresh weakness into the regional transportation markets, as the prior demand recovery looks set to stall as governments race to prevent yet another outbreak.

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In Southeast Asia, President Rodrigo Duterte of the Philippines announced on Aug. 2 that strict lockdown measures would be re-imposed in the capital city of Manila, while in Vietnam, the city of Danang was also placed under new lockdown measure at end-July, following reports of fresh coronavirus cases. Since then, new cases have been reported in other Vietnamese cities, namely Hanoi and Ho Chi Minh City.

Vietnam was the first Southeast Asian country to have successfully reported of no new coronavirus cases in May, reopening businesses and resuming economic activity within the same month.

In line with this second lockdown, Vietnam's driving activity as of Aug. 2 plunged back below baseline levels to minus 26%, the lowest since May, data from technology firm Apple showed.

Australia, which imports more than 60% of its gasoline and gasoil requirements, has also re-imposed COVID-19-related restrictions in August, with the country's second most populous state, Victoria, rushing to contain a new surge in infections.

Demonstrating the impact of the lockdown in Victoria, Viva Energy, Australia's second largest refiner, said in a statement on Aug. 3 that petrol retail sales dropped by around 25% year on year, lower than the nationwide decline of 11%.

DEMAND RECOVERY HOPES DASHED

With the threat of lockdowns rising, sentiment among transportation fuel traders have turned bearish, with most expecting demand to remain lackluster throughout the rest of 2020.

"Demand not only needs to recover back to pre-coronavirus levels, but it also has to sustain at that levels. With the new cases and lockdowns, this is going to seem unlikely," one gasoline market observer said.

Agreeing, another gasoil trader said demand for the middle distillate has also softened following the resurgence in coronavirus cases.

"Yes, demand has stopped improving [due to the rise in COVID-19 cases] and partly also, the floods in China have disrupted domestic demand," an Asian refinery source said, adding that even as regional demand seems to be on a decline, there are "lots of gasoil barrels being exported from China in August".

The bearish fundamentals have been reflected in the steady decline in the FOB Singapore 10 ppm sulfur gasoil cash differential, which is averaging at minus 24 cents/b month-to-date to MOPS gasoil assessments, slipping sharply from the July average of plus 63 cents/b, Platts data showed.

Sentiment in the jet fuel market is bleaker, with the return of international travel looking to be a distant hope.

"I think there's nothing to talk about on demand -- it's simply dead. Jet fuel trading activity is so thin now, and negative headline news can easily dominate the cash differential and [contango] structure," a Singapore-based trading source said.

In its latest outlook in late July, the International Air Travel Association reported that global passenger traffic will likely not return to pre-COVID-19 pandemic levels until 2024, a year later than its previous estimate.

REFINERIES LOWER OUTPUT TO BUOY COMPLEX

But while regional demand is set to face an uncertain future, market participants remain confident that transportation fuels are unlikely to slump to April lows, as regional refiners have already slashed their operating rates.

Among others, South Korea's top refiner SK Energy has been running its refineries at an average run rate of 77% in the second-quarter, the lowest on record, and down from 90% a year ago.

While plans are for Q3 throughput to rise to 80%-85%, levels still remain well under that of 2019, Platts reported earlier.

Taiwanese refiners CPC and Formosa, which export a combined average of six to seven MR cargoes per month, have slashed export volumes as well, with monthly gasoline exports in Q3 estimated at one to two MR cargoes in total, industry sources said.

In Japan, refiners have also kept run rates low at around 60%-65% in July, choosing to import oil products instead as plummeting demand for jet fuel remains tepid. July's lowered run rate was noted to be around 25%-30% lower than a year ago, according to the Petroleum Association of Japan

"On the whole we are seeing fewer barrels from North Asia. This helps a bit. But overall supply is still in trouble because of Chinese exports," another Singapore-based source said.

In August, China was reported to be planning for another bumper oil product exports, as refiners turn to the international market to absorb excess domestic inventories, which have been under pressure due to record high refinery run rates and lower demand.

According to a Beijing-based analyst, China's gasoline exports in August are estimated to rise to around 1.3 million-1.5 million mt, while gasoil exports are estimated to hit 2 million mt.

"I heard that September gasoline exports from China are going to be similar to August. If that is true, we are going to be swimming in gasoline should demand stay poor," another gasoline market source said.