Asian gasoil markets are on the cusp of change and poised to see sustained growth in the fourth quarter as rising vaccination rates boost demand -- just as a reduction in regional output and an open East-West arbitrage reduce supply.
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While the projected recovery has come later than expected due to prolonged lockdowns and mobility curbs to combat the emergence of the delta variant, some sources believe the tide may finally be turning.
Traders said supply-side factors have worked to shore up sentiment for the middle distillate, with regional availabilities shrinking due to a deep cut in gasoil export volumes from key supplier China.
China in August allocated its second batch of oil product export quotas at 7.5 million mt, bringing total allocations to 37 million mt for 2021, 37.3% lower than 2020, S&P Global Platts reported earlier.
In addition, viable East-West economics have opened arbitrage lanes and facilitated the flow of Asian gasoil barrels to the West, further tightening regional supply.
Platts data showed that the front month Exchange of Futures for Swaps – the spread between Singapore 10 ppm sulfur gasoil swaps and ICE low sulfur gasoil futures and a key measure of arbitrage economics -- has averaged minus $14.46/mt to date in September, down from the minus $11.02/mt over August and minus $6.49/mt in July.
A deeply negative EFS spread demonstrates stronger pricing for middle distillate in Europe than Asia, and works to attract swing barrels from Asia to the West.
Bullish sentiment has already emerged for the benchmark ultra-low sulfur diesel grade in Asia.
The average closing price for the Singapore October-November 10 ppm sulfur gasoil derivative time spread surged 142% in first half September from H2 August, S&P Global Platts data showed, as an improving outlook pushed demand sentiment higher amid continued supply tightness in Asia.
The spread has averaged 43 cents/b to date in September, compared with 18 cents/b over H2 August.
On the demand side, upbeat sentiment has been buoyed by positive signs in key markets, with analysts cautiously optimistic that India's gasoil demand will return to pre-pandemic levels before year end and Australia poised for an uptick in demand in Q4 as vaccination rates rapidly increase.
"I think there is a chance of recovery in Australia from October onwards -- if you look at the vaccination rate, it's definitely higher than a month ago," a regional trader said, adding that the "chances of them opening up is quite high".
Agreeing, another source said: "Sentiment in the East is supportive due to less resupply and marginally open arbs to the west, and China's [gasoil] exports are also not expected to be high during August and September."
Market participants estimated China's gasoil exports at around 500,000-650,000 mt/month in August and September, less than half the 1.39 million mt exported in July.
S&P Global Platts Analytics in a Sept. 10 report forecast Asia's Q4 oil demand to be 2.4 million b/d higher than Q3, with China and India accounting for about half of the increase and Southeast Asia around 20%.
Asia's total oil demand growth for 2021 has been adjusted down 200,000 b/d from last month's outlook to 1.4 million b/d, but raised to 1.7 million b/d for 2022, Platts Analytics said.
Medium sulfur outlook brightens
Meanwhile, the beleaguered 500 ppm sulfur gasoil grade may finally experience some relief, with sources cautiously optimistic that prices for the grade may have bottomed out.
The fuel is largely channeled into the bunker fuel sector and is also the main standard of diesel used across Southeast Asia, but consumption has been sluggish amid the pandemic and the seasonal fishing ban in place since May in the South China Sea.
However, with the fishing ban due to be lifted mid-September and Southeast Asian countries striving to revive economic activity after prolonged restrictions and lockdowns, demand for medium sulfur gasoil should pick up in line with economic activity, traders said.
"High seas demand should come back by October, so 500 ppm sulfur gasoil will likely see some improvement as buyers will be purchasing for bunker consumption," a regional trader said.
The cash differential for FOB Singapore 500 ppm sulfur gasoil was assessed at minus $3.05/b to the Mean of Platts Singapore gasoil assessment at the Asian close Sept. 14, steady from the previous session.