Asian Refining Margin Rebound may be Short-Lived

High margins may prompt refiners to increase run rates; Singapore refining margins to Dubai crude double year ago level.

A rapid rebound in Asian refining margins ahead of the autumn maintenance season could prove short-lived as it may prompt refiners to lock in quick profits by increasing their run rates.

Singapore refining margins to Dubai crude <DUB-SIN-REF> hit a 10-month high of $3.32 a barrel on Friday. Though they have since fallen back to $2.19 a barrel on Tuesday, they are still at the highest level since January and more than double levels seen this time last year of around $1.

Margins typically rise in August before refineries close for maintenance but this year's rise in Asia has been accentuated by two other factors.

"The rebound is driven mainly by gasoline and weakness in the Dubai benchmark which is flipping back to contango," said Nevyn Nah, an oil products analyst at research firm Energy Aspects.

Indonesian motorists are buying more petrol amid cheaper pump prices and gasoline supplies in the United States have tightened after hurricanes in the Gulf of Mexico delayed shipments, analysts said.

Refiners also enjoy better margins when the crude market is in contango as it means their feedstock costs are lower. In a contango market, prices of oil for delivery today are lower than those in the months ahead.

However, Asian refining margins could start to fall if their current strength encourages refiners operating below capacity to maximise refinery run rates where possible. Some could even postpone some planned September/October maintenance work to take advantage of fat margins, traders said.

"I think refineries will make hay whilst the sun is at least peeking out, not shining," said Matt Stanley of brokerage Freight Investor Services (FIS) in Dubai. "But alas with higher runs of products, the global product glut could increase, further putting pressure on prices."

That could dash refiners' hopes that demand for the autumn refinery maintenance season in September and October would help draw down product inventories and reduce the glut in global product supplies.

The oil markets expect upcoming winter demand for products to rise from 2015 when a warmer than expected winter depressed demand, but that may not enough.

"This temporary rebound in margins would basically unravel the rebalancing of the products market that has just started, which means that winter would have to be extraordinarily cold in order to draw down product supplies," Nah said.

Reporting by Mark Tay