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APPEC: Asian refiners need flexible fuel output, trading strategies amid prolonged demand uncertainty

Highlights

Collaboration in refining capacity crucial in low oil demand era

Asian refiners should regularly shift product slate, output volumes

Active spot trades essential to keep fuel supply-demand in balance

Singapore — As Asian refiners continue to fret over volatile refining margins and fragile oil demand recovery during the coronavirus pandemic, they must adopt a flexible approach to shift their oil product slate and output volumes to best serve the changing market conditions, industry participants said at the S&P Global Platts Asia Pacific Petroleum Virtual Conference in Singapore Sept. 14.

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Keeping the regional oil product supply-demand in balance amid tepid consumer and industrial fuel demand, and the subsequent need for Asian refiners to appropriately manage fuel production and refining capacities, has emerged as one of the key discussion topics at the APPEC Virtual Conference.

There are numerous new refining projects across the region, including in Indonesia, but there could be an opportunity for discussions to see where, rather than everyone trying to build their own refineries, there may be a way for Southeast Asian industry participants to make collaborative efforts to balance the regional refining capacity to match demand-supply fundamentals, said Arif Mahmood, executive vice president and CEO of downstream at Malaysia's state-run Petronas, during an interview session at the APPEC Virtual Conference.

"Timing wise, obviously now is not the best for the refining business. I don't think [Asia's oil products] demand will pick up fast, at least in the next two to three years," he added.

Mahmood said Petronas would be looking at reshaping its portfolios, looking at the impact to the company's businesses and the sustainability of some of its investments, especially when looking at longer-term low oil prices.

Meanwhile, Asian refiners have witnessed wild swings in crack spreads for various oil products so far this year due to transportation restrictions to contain the spread of the coronavirus, an unprecedented market condition that calls for Asia and global refiners to rigorously adjust their refinery linear programming models and their choice of fuels to produce.

Certain oil products have seen their margins fare much worse than others, such as jet fuel, in Asia. Refiners must rapidly adapt to volatile product cracks and constantly tweak their oil products slate, officials at Seoul-based Korea Petroleum Association and Ulsan-based Korea National Oil Corp. said on the sidelines of the APPEC Virtual Conference.

Asia's oil demand recovery has been uneven across products and countries, so it is crucial for Asian refiners to have the flexibility to respond quickly to the markets by adjusting refinery operations and shifting product yields to meet changing demand composition and fluctuating product cracks, said JY Lim, oil markets adviser at S&P Global Platts Analytics.

EXCESS STOCK CLEARANCE

While minimizing oil products output and keeping refinery run rates low might be one of the solutions to weather the tepid fuel demand environment and volatile refining margins, active participation in the international spot market may also help keep the regional supply-demand dynamic well balanced, industry executives and refinery officials said.

"Sometimes it's more cost economical to import certain oil products rather than producing the fuel. Any build-up in unwanted domestic fuel inventories can also be cleared by active sales in the international spot market," one conference participant said, reflecting a widely-held view among senior middle distillate marketing managers at South Korea's GS Caltex and S-Oil on the sidelines of the virtual APPEC conference.

International trading companies also highlighted the importance of active spot trades in a global collective effort to gradually resolve the current supply glut situation and curb the uptrend in excess inventories.

"There's nothing really in history that compares to the absolute slowdown in oil demand that occurred in March-April and the result of that was around 1.2 billion barrels of build in oil stocks," Vitol CEO Russel Hardy said during an interview session at the APPEC Virtual conference.

"Obviously some of them are in onshore storage tanks, some are [in floating storage vessels] on water. The market is now slowly chewing through that excess inventory and we've drawn around 300 million barrels from that peak... we expect to draw another 300 million barrels towards the year end," Hardy said.

Controlling fuel output volumes is important for regional refiners but more focus should be given to import and export trades to better manage inventories, which would ultimately protect the margins and overall health in the Asian oil product supply-demand fundamentals, a light and middle distillates trading manager at Mitsui said on the sidelines of the conference.

Japan imported an average of 90,534 b/d of gasoline in July, up 73.4% from a year earlier and 18.3% from June, while it exported 13,892 b/d of gasoline, according to preliminary data released Aug. 31 by the Ministry of Economy, Trade and Industry, or METI. Japan was a net importer of gasoline for the fourth consecutive month in July amid low refinery run rates, Platts reported previously.