Singapore — The Asian oil products market started the first-quarter amid expectations that gasoline, naphtha and gasoil markets could face some downward pressure, while the fuel oil market could see some tightness in supplies.
The following are some of the factors that market participants said might influence various Asian oil products in Q1, 2019.
The Asian gasoline markets is likely to remain under downward pressure as prospects of a recovery in regional demand remain uncertain. But China's decision to reduce gasoline export quotas could help to limit the downside. China has awarded 5.19 million mt of gasoline export quotas in its first round for 2019, down 20.8% from the first round in 2018. On the demand side, Indonesia's purchasing power has been hit by a depreciating rupiah.
Some market participants highlighted potential bright spots, which could support prices. March will likely witness some refinery turnarounds and maintenance. Others are looking towards the Middle East for some support as demand in the Arab Gulf is pegged to remain healthy in Q1. The FOB Singapore 92 RON gasoline crack against front-month February ICE Brent crude futures fell to a near seven-year low of minus $1.56/b on December 5. While the crack inched upwards towards the end of the year, concerns over persistent oversupply kept cracks firmly in negative territory for most of December.
The Asian naphtha market looks set to face downside pressure in Q1 as key producers in the Middle East and Southeast Asia move to ramp up production. ADNOC's coker unit that started up in September at Ruwais West refinery will add 300,000 mt/year of naphtha production. Bahrain National Gas has started operations at its third 350 MMcf/d Central Gas Plant, which is slated to double Banagas' annual naphtha exports to 360,000 mt. Malaysia's 300,000 b/d Refinery and Petrochemical Integrated Development, or RAPID, is expected to start up in Q1.
Some 1.5-1.8 million mt of arbitrage naphtha supplies from the US and Europe would reach Asia in January. Additional supplies will also come from Australia, from where Japan's Inpex is expected to load plant condensate from the new Ichthys LNG project. However, with Saudi Aramco planning to take the 225,000 b/d condensate splitter at the Ras Tanura refinery offline for a turnaround in January, the net length brought over from December will likely shrink. The East/West naphtha swap inked the highest level in nearly three years at plus $26/mt on December 4.
The direction of the Asian LPG market will largely hinge on relations between the US and China and developments on Iran sanctions. China's tit-for-tat action in imposing higher tariffs on US LPG have largely halted imports and created a two-tier spot market -- a Middle East market, which is in line with prevailing market conditions, and a US market that carries a discount to Middle Eastern cargoes. This is expected to continue in early 2019 as Chinese importers seek alternative cargoes from the Middle East and Africa, while Asian buyers absorb US cargoes.
Indonesia, South Korea and Japan, which continue to take US tons, will be watching if the current cold Western winter will persist through Q1 and prompt cargo cancellations. With Iranian exports constricted since the November 4 US sanctions, Chinese demand will lean more heavily on other major Middle East producers. The market structure for January/February is wavering between a slight contango and parity, while February/March and March/April are around a backwardation of $6/mt and $12/mt, respectively. Sentiment during the cold season has turned slightly bullish amid expectations of improved demand and concerns over a possible supply squeeze.
The Asian gasoil market heads into Q1 amid surplus availability and weak demand. Sentiment has turned bearish on high levels of gasoil export quotas from China. In addition, China's domestic demand for gasoil has slowed, with construction projects and agricultural activities cooling because of seasonal winter weather. The Chinese Lunar New Year period could further stall any recovery in demand.
The bearishness was reflected in a lackluster gasoil market in December, with poor demand and ample supplies resulting in the benchmark FOB Singapore 10 ppm sulfur gasoil cash differential sinking to a record low of minus $1.02/b to the Mean of Platts Singapore Gasoil assessment at the close of Asian trade on December 21, 2018. While the market remained weak from oversupply woes, there was a glimmer of hope for the Asian gasoil market. Sources said gasoil outflows from several regional refineries, such as India, would decrease due to scheduled turnarounds, gradually tightening supplies.
The Asian jet fuel/kerosene spot market started the year on a weaker footing, as a glut of surplus cargoes pressured cash differentials. While demand has been steady during the winter season, market participants continued to point to a ready availability of cargoes from South Korea, and China. This led FOB Korea differentials to plummet to a two year low of minus 95 cents/b on January 7 in the midst of winter -- when the market typically hits its annual peak. Some market participants held out hope that the market would revert to its seasonal strength in Q1 as the winter intensifies.
Others were more skeptical, and remained concerned that the market could face difficulties clearing the stubborn supply overhang in Q1. The recent startup of the Hengli Group's 400,000 b/d Dalian refinery, the 200,000 b/d Nghi Son refinery could also prove to be challenging for a market that is already struggling to digest product. Outflows from the 400,000 b/d Hengli refinery, which started trial runs in December, is also of particular interest to the jet market, as it is configured to produce a whopping 3.6 million mt/year of jet fuel.
The Singapore high sulfur fuel oil market is expected to tighten in Q1 as the arbitrage window from the west to Singapore has been shut since early December. Singapore is likely to receive only 3.5 million mt-4 million mt of fuel oil cargoes from Europe and the US in January, down from 4 million mt in December. The 380 CST East/West spread -- or the spread between Singapore 380 CST HSFO swaps and 3.5% sulfur FOB Rotterdam barge -- dropped early December as a result of weak Singapore prices. On the demand side, volumes are expected to rebound in January from December levels.
This may lead to steady Singapore bunker fuel premiums into early Q1 2019. Initial term contracts inked for Q1 ex-wharf 380 CST bunker fuel were between $7/mt to $7.50/mt, but offers had later increased to $8/mt to $9.50/mt. Spot ex-wharf 380 CST bunker fuel premiums over MOPS 380 CST HSFO averaged about $8/mt in December, S&P Global Platts data showed. Bunker suppliers and traders expect relatively stable demand, with Singapore monthly volumes estimated at around 4 million mt.
-- Sambit Mohanty, email@example.com
-- Asia markets team, firstname.lastname@example.org
-- Edited by Norazlina Jumaat, email@example.com