Mohi Narayan, Koustav Samanta

SINGAPORE (Reuters), – Asian oil refining companies’ margins rose to the highest levels since prior to the COVID-19 epidemic. The rise in demand and global economic recovery have fueled a doubling of profits for gasoil, according analysts and traders.

The rise in gasoil consumption is due to power generators looking for alternative fuels to the coal-rich record highs and because industrial demand has increased as countries reopen their economies from COVID-19. This has seen the gasoil profit margin rise to nearly 60% in the last month. It is now the main component of overall refinery profits.

As a proxy of Asian refiners’ profitability, the Singapore complex refining margin jumped to $7 per barrel in March, its highest level since September 2019.

Although the recovery will motivate Asian refiners, it is likely that they will increase their output in coming months. However, low inventories and falling Chinese exports are expected to limit regional supplies of refined petroleum products.

Citi analyst Oscar Yee stated that there was an improvement in momentum for Asian refiners. This is due to the benefit of the near-term oil-to-gas switching this winter, but also from peaking Chinese oil product exports. The note raised the bank’s outlook on South Korea’s SK Innovation and Thailand’s Star Petroleum Refining Pcl, IRPC PCL and Taiwan’s Formosa Petrochemical Corp.

Regional gasoline demand will likely rise by 100,000 barrels/day (bpd), in November and December respectively. However, gasoil consumption is forecast to increase by about 200,000 BPD between now and December.

“Low exports from China will continue to support Asia’s gasoil complex through to the end of 2021,” he said.

Sim also stated that the middle distillate stocks across Asia’s key storage hubs is at its lowest point since 2013. They are 9.1 Million barrels lower now than in 2017-2019. Sim explained that this was after refiners reduced output due to recent losses.

Consumers will switch to diesel to meet global power needs due to rising natural gas prices and spikes in coal prices. Consultancy Rystad Energy predicts that the shift in fuels will boost Asia’s oil consumption by an average of 400,000 barrels per day over the next six-months.

Refinitiv data revealed that refiner profit margins in benchmark gasoil in Singapore with 10 parts per Million of sulphur are at an all-time high, while margins in 92-octane gasoline have increased about 50% since October.

Graphic: Singapore oil refining margins – https://fingfx.thomsonreuters.com/gfx/ce/zdvxornnrpx/MicrosoftTeams-image%20(10).png

Daphne Ho, Wood Mackenzie analyst said, “We see gasoil cracks growing towards the end in the year.” Also, stronger demand for jetfuel and kerosene would hinder these fuels being mixed into the gasoil pool.

A Singapore-based trader in gas oil said that Asian refiners will need to increase output for at least one month, as many plants remain closed during October.

“We can have slightly better (gasoil) supply from November, but still (that would be used) to cope with the potential increase in demand regionally,” the trader said.