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Asia oil products outlook: Gasoil demand remains high, jet fuel faces oversupply in Q4

Singapore — The Asian oil products market started the fourth quarter with expectations of high demand for gasoline, naphtha and gasoil, while China's decision to raise tariffs on US imports will continue to be a key factor influencing LPG trade flows. The following are some of the factors that market participants said might influence various oil products in Asia in Q4.

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GASOLINE

The Asian gasoline market is expected to see strong demand for October barrels amid supply tightness, providing support to prices in early Q4. Traders also said that the recent weakness in European and North American gasoline markets could affect sentiment in Asia. The benchmark FOB Singapore 92 RON gasoline price hit the highest level in almost 50 months on September 27, when it was assessed at $89.93/b. It was last higher on November 10, 2014, when it was assessed at $92.36/b.

Some traders were skeptical about whether the market could maintain the current momentum. On the demand side, trade sources said that Pertamina planned to import around 11 million barrels of gasoline in October, slightly lower than the estimated 11 million-12 million barrels in September. Limited supply from China and a fall in production due to refinery outages in the Middle East could support prices, they added.

NAPHTHA

The Asian naphtha market is expected to see a modest recovery in Q4 as many steam crackers will restart at the end of November after maintenance. The naphtha complex remained weak in Q3 due to a high inflow of arbitrage volumes and weak demand for paraffinic naphtha for steam crackers. The CFR Japan naphtha physical market sank briefly into a contango structure in the second week of September before returning to backwardation.

Demand for heavy full-range naphtha could regain ground as regional condensate prices show signs of firming up. The market was also waiting for the outcome of annual term supply negotiations between end-users and Middle Eastern naphtha suppliers.

LPG

China's higher tariffs on US imports will prompt Chinese traders to seek Middle Eastern and African LPG, but high demand from elsewhere in Asia is likely to absorb US cargoes. Middle Eastern LPG has received a boost from Chinese demand, narrowing the differential to thin discounts, or even parity, to the Saudi Aramco Contract Price, while non-US cargoes are commanding a premium of around $7/mt above US parcels.

At least 1.8 million mt of LPG is expected to flow into Asia in November. These cargoes are expected to find ready buyers in Indonesia, South Korea, Japan and Taiwan, especially with the discount for propane to Mean of Platts naphtha assessment widening to more than $40/mt recently. With US sanctions on Iran set to kick in by early November, worries are growing over how Chinese importers will cope if Iranian cargoes are restricted. Some sources said that since Chinese importers, and those who ship LPG to China, have their own vessels to pick up Iranian cargoes, the impact of the sanctions might not be too severe.

GASOIL

Sentiment in the Asian gasoil market is bullish for Q4, with high demand pushing the price above the $100/b mark for the first time in nearly four years, a trend that could continue into Q4. While the rise in gasoil prices was partly led by the rally in crude oil futures, industry sources said that a firm gasoil/Dubai crack reflected the relative strength in the market. At Asian close on October 2, the FOB Singapore 10 ppm sulfur gasoil crack against front-month cash Dubai crude stood at $17.88/b, up 36 cents/b from October 1.

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Demand from Southeast Asia and India is expected to see a seasonal rebound over the next few months. On October 2, Platts assessed FOB Singapore 10 ppm sulfur gasoil at $100.83/b. Platts data showed that the flat price for FOB Singapore 10 ppm sulfur gasoil was last higher on October 14, 2014, when it was $102.14/b. Asian gasoil traders said the continuous rise in prices was a reflection of demand, with traders pricing in expectations of a drop in regional supply because of refinery maintenance scheduled for Q4. Looking ahead, the market will be waiting for news on whether China will release a third batch of oil product export quotas.

JET FUEL

The jet fuel market heads into Q4 with a supply overhang in North Asia and Singapore, while a closed arbitrage window will likely keep the product trapped within the region. Record high travel demand in the US supported the Asian market this summer, but most of that buying interest has fizzled out, leaving the region awash with cargoes. The closed trans-Pacific arbitrage window and a strong Exchange of Futures for Swaps hampered cross-regional flows, resulting in surplus barrels from South Korea and India getting diverted to Singapore.

Saddled with excess supply, FOB Singapore spot cargo differentials flipped back into discount territory on September 24 to the Mean of Platts Singapore jet fuel/kerosene assessments minus 23 cents/b, after briefly touching parity levels. There is some buying interest from China and South Africa, but volumes are not big enough to support the market. Demand for jet fuel/kerosene cargoes for heating during the December-February period is expected to support prices later this year.

FUEL OIL

The high sulfur fuel oil market in Singapore is expected to start Q4 on a strong note because of tight supply. Inflow of arbitrage cargoes from Europe and elsewhere in the West to Singapore was expected to be around 3 million-4 million mt in October, compared with 4.5 million mt in September. Traders attributed the decline to refinery turnaround and the startup of new cokers. Meanwhile, the spread between Singapore 380 CST HSFO and 3.5% FOB Rotterdam barge widened amid high Singapore prices. The spread widened to $25.70/mt on September 27, the widest since June 2, 2015, when it was at $26.85/mt, S&P Global Platts data showed.

Traders said that the arbitrage window was currently open and cargoes traded recently would reach Singapore only in November. In the case of bunker fuel, demand is expected to strengthen in Q4 when shipping typically picks up before the Christmas holidays.

--Asia markets team, newsdesk@spglobal.com

--Sambit Mohanty, sambit.mohanty@spglobal.com

--Edited by E Shailaja Nair, shailaja.nair@spglobal.com