The Asian gasoil market is standing at crossroads with traders weighing regional demand and supply balances, which have shifted to more uncertain territory in light of an evolving COVID-19 situation as well as sharp cuts to North Asian gasoil export volumes for the second-half, most notably from major supplier China.
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Multiple industry sources said traders preferred to wait by the sidelines over the past week amid a recalibration of the regional outlook, but thin trading activity has ironically worked to result in a choppy market that has left participants struggling to make sense.
Platts data showed that at the Asian close on June 22, the July-August FOB Singapore 10 ppm sulfur gasoil derivative time spread had flipped into a contango of minus 2 cents/b, and remained in negative territory for just over a week before jumping back into a backwardation of plus 8 cents/b at the 0830 GMT close on July 2.
But even this was short-lived, lasting only two days before it slipped back into a contango of minus 1 cent/b at the Asian close on July 7.
At 0300 GMT July 8, the prompt gasoil intermonth spread was at an intraday value of minus 2 cents/b.
"This market is not easy," an Asian trading source said late July 7. "OTC [Over-the-counter] is quiet, and I think everyone is just doing what they are supposed to do... nobody wants to do much," he said.
The swings from positive to negative terrain has also confounded some market participants.
"We have the physical window trading at discount, and then we have the front spreads going into backwardation -- it is too weird," another industry source said, adding that he had expected the gasoil complex to be pricing more strongly given the cuts to Chinese gasoil exports.
"In the first place, it was strange when the market went into a contango in June because although with the lockdown happening in June, we lost some demand, but we lost even more supply. Now fast forward to July, I see supply drifting down even more and unchanged month-on-month for demand. So in fact, the July situation should be much better than in June... so I don't know, I think no one really has a view," the source said.
The lackluster market has come on the back of continued uncertainty over gasoil's path to demand recovery amid a constantly evolving regional coronavirus situation -- which has been driven by more transmissible variants -- and sharply differing rates of vaccination being rolled out across Asia.
Snap lockdowns and people and movement restrictions have dented gasoil demand as reports of climbing caseloads in multiple countries experiencing yet another wave of infections have lent downward pressure to the consumption outlook for the middle distillate, with this coming even as other countries cautiously rollback restrictions following a decline in confirmed cases.
Even as demand remains fragile, some sources opined that the market should have been shored up on expectations of tightening gasoil balances thanks to steep cuts to Chinese gasoil exports over H2.
"For June gasoil exports [from China], it's about 1.2 million mt and for July, we think its 800,000 mt," a Singapore-based trader estimated, adding that these figures were sharply lower from May's export volumes of around 2 million mt, and even lower than the multi-month high of 2.81 million mt exported in April.
Traders have also said that many are awaiting the release of China's H2 gasoil export quotas, which may provide more certainty on supply balances ahead.
"There's not been much exports from China and its going to be quiet for a while until the next export quota is out," a source with a North Asian trading house said.
"It was expected to be announced by end June, but till now, there's nothing... we'll just have to see how things go," he said.
Another trader echoed similar sentiments, saying: "So the question is, what now? Is [the gasoil intermonth spread for] August-September going to be more like [balance] July-August or September-October? We are at this crossroad now where most are not sure what to do," he said.