Boost to Asian Refining Margins Will Fade

One of the persistent themes in the letter pages of my local newspaper is why, if crude oil prices have halved in the past eight months, am I still paying so much for petrol to fill my car?

The writers invariably see some conspiracy involving price-gouging by fuel retailers, refiners and the government, and want somebody, anybody, to take action to end the injustice.

As with all good conspiracy theories there is an element of truth in some of the allegations, even if they are nowhere near as sinister as the letter writers imagine.

There a few broad trends that can be identified, and they aren't unique to Australia, affecting many countries across Asia.

Retail fuel prices haven't fallen by nearly as much as crude oil prices, and for a variety of reasons that vary from country to country.

One of the common themes in Asia has been governments finally doing the right thing and using the 50 percent plunge in Brent crude since last June to get rid of fuel subsidies.

In some cases, such as China and India, the authorities have been raising fuel taxes as well, partly to raise revenue but also to prevent demand from blowing out.

However, the main factor at work hasn't been government intervention in fuel markets, rather it has been that Asia's refiners have been rebuilding margins after years of low profits amid relative high crude prices.

Australia shows this phenomenon at work, given that there has been only a tiny change to government taxes, amounting to half an Australian cent (0.4 U.S. cent) per litre in the past year.

The retail price of gasoline, called petrol in Australia, has fallen about 25 percent since peaking around the middle of last year, while Brent has dropped by about 42 percent in Australian dollar terms.

If the excise of 38.6 Australian cents a litre is removed from the calculation, the non-tax component of the retail price has declined by about 33 percent, still short of the decline in oil prices.

By way of comparison, retail gasoline prices have dropped 29 percent in local currency terms in China from their recent peak in June 2014, while those in India have fallen 23 percent since last July.

However, over the same period the margin from processing a barrel of regional benchmark Dubai crude oil at a typical refinery in Singapore has almost doubled, according to Reuters data.

Refiners were making $8.80 a barrel as of Tuesday, up from an average of $4.84 in June last year, when Brent reached its recent peak above $115.

This fits the longer-term trend of refiners rebuilding margins when crude prices fall, but squeezing them during times of higher oil costs.

GOOD TIMES ENDING?

The problem for refiners is this may be as good as it gets, assuming that crude prices don't continue to drop, rather they stabilise around current levels and then trade in a $20 a barrel range for the foreseeable future.

Part of the reason refiners have been able to rebuild margins in recent months is because demand has picked up, even though retail fuel prices haven't fully reflected crude's plunge.

China's gasoline demand has increased far more rapidly than its diesel consumption, as the former is more related to consumers and the latter to industry.

Gasoline output rose 14 percent in December from the year earlier month and by 12.3 percent over the whole of 2014, according to official figures.

On the other hand, diesel output only gained 2.4 percent in 2014, showing that lower retail prices have encouraged consumers to drive more, or buy less economical vehicles, or both.

However, it's likely that the strength in refinery margins will lead to higher output of fuels across the region, as refineries return from annual maintenance and spare capacity is put to use.

New refineries will also add to the amount of product, with Saudi Arabia's 400,000 barrels per day (bpd) Yasref plant starting to load cargoes this month, and Abu Dhabi's expanded Ruwais refinery starting output at its new units.

China's refining capacity reached about 14 million bpd by the end of last year, and could expand by another 360,000 bpd this year.

With no shortage of spare refinery capacity in China and at export-orientated facilities in the Middle East, it's likely that margins will once again start to compress from the second quarter onwards.
By Clyde Russell