After relishing a cocktail of cheap crude mixed with profits from fuel sales, Asia’s oil processors are facing their reckoning over a lack of restraint.
Profits from turning crude into fuel in Asia since the beginning of April have averaged almost a third lower than levels over the previous six months, and are down 40 percent from the same period a year earlier. That’s already prompted some refiners in South Korea to cut processing rates, with industry consultant IHS Inc. saying the reductions may be a harbinger of wider decreases across the region.
Amid the biggest drop in crude prices in a generation and surging demand for gasoline, refiners across Asia boosted operations as they sought to cash in on strong profit margins, according to industry consultant FGE. But as oil rebounded this year and growth in fuel consumption lagged behind the increase in output, the surplus has flooded the market and lifted stockpiles in the regional trading hub of Singapore to record levels.
“The combination of low crude prices, good margins and strong gasoline in the fourth quarter of 2015 to the first quarter of this year was the perfect recipe for Asian refiners,” said Nevyn Nah, a Singapore-based analyst at industry consultant Energy Aspects Ltd. “They became a victim of their earlier success as this pushed stockpiles to an all-time high in Asia and ultimately eroded their profits.”
The profit from turning benchmark Dubai crude into fuel in Asia has averaged less than $5 a barrel since April 1, compared with almost $8 in the same period last year and $7 over October 2015 to March 2016, data compiled by Bloomberg show. Inventories of fuel in Singapore have averaged a record 52.1 million barrels this year, according to data from International Enterprise, a unit of the city-state’s Trade and Industry Ministry.
Brent crude, the benchmark for more than half the world’s oil, has surged almost 80 percent since plunging to a 12-year low in January. While prices are now at about $49 a barrel, they are still more than 50 percent lower than mid-2014 levels.
GS Caltex Corp., South Korea’s second-biggest refiner, was said to have reduced the operating rate at its Yeosu refinery by about 5 percent over May and June, while Hyundai Oilbank Co. plans to cut processing at its Daesan unit next month. IHS says the decreases may spread to plants in other nations including China as margins shrink.
“With the margins at where they’re today, there is every incentive to start to trim,” Yong Liang Por, Hong Kong-based head of Asia-Pacific energy research at BNP Paribas SA, said by phone. “What happened is that the refiners overdid it. Even as demand has been very strong, supply has more than kept up.”
Bottom of Form
Some processors remain confident. SK Innovation Co., South Korea’s largest refiner, isn’t considering cutting operating rates as its facility is currently undergoing maintenance work, said Kim Woo Kyung, a spokeswoman for the company. “Weakened gasoline, which has been driving the refining margins, seems to be forming an atmosphere in the market that margins will stay low,” she said. But they will improve as stockpiles and run rates in the U.S. shrink, drawing fuel supplies to America, according to Kim.
Still, SK Innovation had said in April that it doesn’t expect profits from making gasoline to outperform 2015 levels. And 10 officials from Asian refiners surveyed by Bloomberg News said they see margins worsening in the third quarter of this year, with half the respondents signaling the possibility of processing cuts in response to the decline.
Refining margins at major Asian processors were as of earlier this month about $1 a barrel above the level where operators will cut run rates, according to Nah of Energy Aspects. While that gap over the threshold is a “good buffer,” temporary events such as strikes in France and poor weather that supported profits were expected to fade, he said.
“Margins in the second half of this year is going to be worse than the first half,” said Victor Shum, a Singapore-based vice president at IHS. “Directionally, it’s heading down and when margins come down, refiners will respond to this price signal and that response will be to cut runs.”-Bloomberg