Budgets depleted, an increasingly indignant population, and the prospect of confronting the same old COVID-19 scare once again - this is the reality that we have woken up to this September. The Asian oil markets have been buzzing with talks of 2nd wave coronavirus implications, all the while for some countries (such as India, already the second-highest globally in terms of total cases) the first wave has still not reached its peak. Against such a background little wonder that the overall sentiment for this autumn has become dimmer and grimmer by the day, as Brent has slipped back below $40 per barrel, floating storage is back in the game on the back of strengthening contango. Looking at the specificities of current Asian products' markets and Middle Eastern producers' recent OSP moves, the sentiment that the real trough is still waiting out there for us cannot but overwhelm the mind.
The main factor underlying the price drop is the weakness in overall Asian demand. Refining margins remain remarkably depressed, jet fuel crack spreads have been negative across the Asia Pacific for almost a month already, whilst gasoil and low-sulfur marine fuel margins have squandered all the advances of the past 2 months. If an industrial monster like Reliance's 1.2mbpd Reliance Refinery is running at a mere 75% (across India the average rate has been around 70% in August), you know that trouble is brewing. This is especially noteworthy as summer generally tends to be maintenance-heavy,…
Budgets depleted, an increasingly indignant population, and the prospect of confronting the same old COVID-19 scare once again - this is the reality that we have woken up to this September. The Asian oil markets have been buzzing with talks of 2nd wave coronavirus implications, all the while for some countries (such as India, already the second-highest globally in terms of total cases) the first wave has still not reached its peak. Against such a background little wonder that the overall sentiment for this autumn has become dimmer and grimmer by the day, as Brent has slipped back below $40 per barrel, floating storage is back in the game on the back of strengthening contango. Looking at the specificities of current Asian products' markets and Middle Eastern producers' recent OSP moves, the sentiment that the real trough is still waiting out there for us cannot but overwhelm the mind.
The main factor underlying the price drop is the weakness in overall Asian demand. Refining margins remain remarkably depressed, jet fuel crack spreads have been negative across the Asia Pacific for almost a month already, whilst gasoil and low-sulfur marine fuel margins have squandered all the advances of the past 2 months. If an industrial monster like Reliance's 1.2mbpd Reliance Refinery is running at a mere 75% (across India the average rate has been around 70% in August), you know that trouble is brewing. This is especially noteworthy as summer generally tends to be maintenance-heavy, for instance, India's Paradip Refinery or Australia's Lytton Refinery extended their initial turnaround timeframe, cognizant of the weak refining margins and decreasing demand.
Following Saudi Aramco's resolute price-slashing with its Asian October 2020 OSPs in what might be perceived as a rectification of September's undue self-confidence, other Middle Eastern producers followed suit. Iran, which nowadays only ever moves its crude in the direction of China and Singapore, has dropped its Iranian Light and Heavy prices by -1.45/-1.2 per barrel, on a month-on-month basis. The Emirati ADNOC, the most recent addition to the month-ahead OSP-setting family, has implemented an across-the-board 1.35 per barrel hike for all its grades, concurrently sending waves across the Asian markets in late August by declaring that it would carry out a 30-percent nomination cut across its crude portfolio for its October-loading cargoes.
As gloomy as the picture might look, at first sight, there were several factors that have pushed against the general negative trend. For instance, gasoline margins have received an unexpected boost this week when one South Korean and one Thai refinery shut their catalytic cracker units, due to the Haishen Typhoon and to a sudden fire outburst respectively. Add to this the reduced gasoline production of the 540kbpd Mailiao Refinery in Formosa (ramifications of a recent fire) and the fact that a hefty part of US downstream assets was confronted with Hurricane Laura, one might expect a steady rejuvenation of refining margins, however, the eventual effect was quite subdued - primarily because Chinese production stayed high all along.
Graph 2. Official selling prices for UAE crudes destined for Asian buyers.
Source: ADNOC.
Speaking of China, when one is to look at the expected crude import volumes in September, the last thing one would expect to happen is a demand slump - the September numbers are notionally assessed at 12.2mbpd, the highest-ever monthly volume. Yet there is ample reason to doubt that the previous record of 11.2mbpd (July 2020) will be surpassed as China still struggles to overcome its port congestion. Generally speaking, China's main problem nowadays lies in its massive crude stocks, especially those that are still aboard the many vessels anchored around Chinese ports - refining all the light sweet crudes that its refiners have bought throughout the summer shopping spree turned out to be quite the challenge.
An average light sweet cargo takes roughly a month to discharge following its arrival and with refining rates slowing down it is difficult to foresee any speedy drawdown of stocks in the upcoming weeks. Qingdao itself has some 8 million tons of crude anchored offshore, with Ningbo having another 5 million tons anchored - in effect, surplus crude at just 2 ports would be enough to cover a third of China's monthly refining needs. In addition to the above, the intense activity of China's teapot refiners has led them to run out of 2020 annual import quotas. Although it is very likely that the Chinese authorities would issue additional import quotas for independents, this would most probably take place in Q4 2020 so the firms cannot really act in anticipation.
Graph 3. Main Asian Crude Exporters by Monthly Volume in 2017-2020 (million barrels per day).
Source: Thomson Reuters.
One might expect a similarly delayed reaction with regards to India which has just posted a sizeable month-on-month decline (down 7.5% from July) in nationwide fuel consumption, attesting to the fact that the recent coronavirus surge has strengthened its grip over the nation's economy. India's September crude arrivals are on par with August 2020 yet considering that most of its arrivals were on voyages whose duration is 30+ days, the really interesting figure would be that of October. As far as one can see, the October arrivals to India already suggest a palpable decrease of light sweet West African crudes (perhaps to the extent of halving India's usual intake of 16-18 MMbbls per month.
Graph 4. Chinese Refineries' Top Import Grades May-September 2020, basis CFR Northeast Asia.
Source: Platts.
Yet it is not merely the Middle Eastern crudes that saw their market differentials fade in the past weeks. The constraints inherent in import quotas have been mirrored in this month's trading of those grades that can be considered the teapot's favorites, such as Russian ESPO, the Angolan Dalia, or the Congolese Djeno. Following a brief period of increasing differentials in the first days of September, West African grades plummeted and have been hovering around the Jan ICE Brent flat mark ever since. Given the geographic distance and all the logistics specificities arising therefrom, these crudes would be marketed much further out - it is precisely for this reason that the current overhang of November-loading cargoes is causing so much headache for traders.
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