Asia's Gasoline Party Crashed by China, India

If you had asked Asia's refiners at the start of the year where they thought their profits would be coming from, it's likely many would have said gasoline. But China and India appear to have crashed that party.

The profits from making the motor fuel have collapsed this year to the lowest in 3-1/2 years, with a barrel of 92-RON gasoline in Singapore fetching a premium of just $2.21 over a barrel of Brent crude on July 22.

The profit margin, or crack, <GL92-SIN-CRK> has slumped 85.3 percent this year, and the low of $1.67 a barrel on July 8 was the worst since Sept. 12, 2013, when it was just 45 cents.

While there are several factors at work, including lower-than-expected demand in the region, the main factor is rising supply. And here the main culprits are China and India, both of which have significantly ramped up exports of gasoline in the first six months of 2016.

China exported 4.449 million tonnes, or about 207,800 barrels per day (bpd), of gasoline in the first half, a 75 percent increase on the same period last year, according to customs data.

The surge in exports came as China's refiners boosted output of gasoline by 8.9 percent to about 3 million bpd.

In some ways the increase in China's gasoline exports isn't surprising, given the massive refinery building programme of recent years that has resulted in a significant surplus, which came just as the domestic economy lost momentum.

Perhaps more surprising is the increase in India's exports of gasoline, given they came against a backdrop of strongly rising domestic consumption.

India exported about 420,800 bpd of gasoline in the first six months of 2016, up 23.5 percent from the 340,000 bpd over the same period last year, according to calculations based on government data.

And as an aside to the higher exports from China and India, it's worth noting that the Middle East's new refineries are also having an impact.

For example, Joint Oil Data Initiative figures show Saudi Arabia exported 219,000 bpd of gasoline in May, the latest month for which figures are available. This was up 47 percent from the same month in 2015.

For the first five months of 2016, Saudi Arabia exported an average 213,400 bpd of gasoline, up 76 percent over the same period in 2015.

Taking the increase in gasoline exports of India, China and Saudi Arabia together and its likely that about an additional 260,000 bpd of the fuel was available in Asian markets in the first half of the year.

GASOLINE IN STRUCTURAL CHANGE
This goes a long way to explaining the slump in profits from making gasoline, but it doesn't necessarily mean that cracks can't recover in the second half.

The main hope for a better third and fourth quarter for gasoline margins lie in the upcoming refinery maintenance season, particularly in North Asia.

Also demand tends to pick up for the northern winter, which may also offer support to refinery margins.

On the supply side, there are some signs of refiners trimming throughput in response to weaker prices, with some plants in Singapore and South Korea expecting to reduce operating capacity, according to a Reuters report citing sources with knowledge of operations.

But any relief on margins from a combination of reduced supply and expectations of higher demand may prove temporary.

There is little doubt that both Chinese and Middle Eastern refiners have the ability to ramp up exports further should it be profitable for them to do so.

And the fact that India's exporters have increased shipments of gasoline so far this year also shows that they are keen to participate in the regional markets even though domestic demand is a positive picture for them.

Similar to many other commodities, such as coal, steel, aluminium, the over-investment in new oil refineries has created a structural oversupply of products that will take time to work through.

This will especially be the case if refiners decide to follow the pattern of other commodity producers and try to cut costs and maximise output, a strategy that does little to balance the market but does lead to sustained lower prices.

By Clyde Russell