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Outlook 2019: Asia middle distillates supply to tighten as market braces for IMO 2020

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Outlook 2019: Asia middle distillates supply to tighten as market braces for IMO 2020

Highlights

2019 gasoil term prices higher, reflects consensus of a tighter market

Refinery capacity coming online to lend some relief

Singapore — The Asian middle distillates market in 2019 would likely be shaped by the repercussions that marine fuel sulfur restrictions will have on the wider oil complex. On January 1, 2020, shippers will have to abide by a 0.5% marine fuel sulfur cap set by the International Maritime Organization. The current sulfur limit in force is 3.5%.

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While the installation of scrubbers, or exhaust gas cleaning systems, on vessels allows shipowners to bring emissions in line with the 0.5% sulfur limit, there is also keen interest in increasing gasoil blending in the marine fuel pool.

Estimates from Marine and Energy Consulting Limited presented at the 2018 Singapore International Bunkering Conference and Exhibition predict that at least half of the world's global bunker fuel demand -- 150 million mt out of 300 million mt in 2020 -- will eventually be met by fuels with a sulfur content of 0.1-0.5%. The jet fuel market will also be indirectly affected as refiners maximize gasoil yields at the expense of jet output.

"The general picture is a global, 2 million b/d increase in gasoil demand," a Singapore-based trader said.

The "500 ppm sulfur gasoil demand should be much better [in 2019], because of additional marine gasoil demand, and also, demand should be boosted as China starts to implement their version of an Emission Control Area zone and tightens sulfur limits on fuels for all vessels in the ECA," a second trader said.

From January 1 this year, all vessels must switch to fuel with a maximum sulfur content of 0.5% once they enter the ECAs: the Pearl River Delta, the Yangtze River Delta and the Bohai Rim.

2019 GASOIL TERM LEVELS HIGHER AS MARKET EXPECTS TIGHTNESS

Reflecting these expectations, firmer term prices were reported inked for the 500 ppm sulfur gasoil grade for 2019, as compared to 2018 term levels.

Taiwan's Formosa Petrochemical Corp. sealed its 2019 term contracts at a discount of 50 cents/b to the monthly average of Mean of Platts Singapore Gasoil assessments on an FOB Mailiao basis, compared to a 65 cents/b discount last year.

South Korean SK Energy was reported to have concluded their term supply agreements for 2,500 ppm and 3,000 ppm high sulfur gasoil at MOPS Gasoil assessment minus $2.60-$2.90/b, FOB Korea, slightly higher than the minus $3/b levels last year.

Other South Korean refiners, GS Caltex and Hyundai Oilbank, were reported to have agreed to term discounts of 50-60 cents/b to the same benchmark for the 500 ppm sulfur medium grade, traders said.

"The term price level for all high sulfur grades improved in line with the imminent IMO implementation," an industry source said.

The derivatives market appears to support this view, as crack spreads closer to the January 1, 2020, deadline also reflect a consensus that the distillates market will tighten.

Platts assessed the Singapore January 2019 10 ppm/Dubai swap crack at $12.56/b Friday, and the January 2020 10 ppm/Dubai swap crack at plus $17.39/b. The January 2019 jet fuel/Dubai swap crack spread was assessed at $14.26/b, $3.99/b lower than the January 2020 crack.

NEW REFINERIES TO EASE SHORTS

Still, a measure of relief could come from recent and upcoming refinery expansions in Asia, which is expected to see an increase in supply, thanks to a growing number of greenfield refineries coming on stream.

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Market participants said projects such as the Hengli Group's 400,000 b/d Dalian refinery, the 200,000 b/d Nghi Son refinery, and Hengyi Industries' upcoming 175,000 b/d plant in Brunei would all work to lend more supply to the market.

"We will see less products going into Vietnam, new flows within Southeast Asia, and more jet flowing to the US West Coast," a distillates trader said, commenting on the possible implications of these launches.

The 400,000 b/d Hengli refinery in particular is configured to produce 1.6 million mt/year of gasoil, as well as about 3.6 million mt/year of jet fuel. Product yields can be adjusted, with high flexibility, to market conditions, Hengli company sources previously said.

The company is privately-held and unlikely to obtain a substantial oil product export quota from the government, traders said. This would likely impact Chinese state-owned refineries' domestic market share as they would be pushed to increase exports.

--Clarice Chiam, clarice.chiam@spglobal.com

--Zameer Yusof, zameer.yusof@spglobal.com

--Ng Jing Zhi, jz.ng@spglobal.com

--Su Yeen Cheong, suyeen.cheong@spglobal.com

--Edited by Geetha Narayanasamy, geetha.narayanasamy@spglobal.com