North Asian Refiners Slash Spot Prices on Weak Demend

Competition from US shale leaves naphtha margin at 26-month low; North Asian refiners sell gasoil, naphtha at deep discounts. Refineries could make run cuts if margins continue weak.

North Asian refineries are slashing spot prices of most oil products to multi-year lows to get rid of high inventory as they battle weak regional demand and competition from a booming U.S. shale market, industry sources said.

Some might also consider run cuts if oil product margins continue to slide and supplies remain ample.

The Asian gasoil margin has averaged about $14 a barrel above Dubai crude so far in October, compared with about $17 in the same period last year, Reuters data showed.

Weak demand from the industrial sector due to slowing economies in big consuming countries such as China is putting downward pressure on gasoil prices even though the fourth quarter sees peak demand for the fuel used for heating.

The Asian naphtha crack hit a 26-month low of $62.63 a tonne on Oct. 10, before recovering slightly to $63.95 on Monday, partly due to the U.S. shale boom and the flow of east-bound cargoes from Europe and the Mediterranean.

KEEP RUN RATES

Most North Asian refineries are maintaining run rates at above 80 percent as they are forced to meet term commitments, while some are taking advantage of cheaper feedstock such as crude oil, driving up inventory and lowering prices of oil products, traders said.

Taiwan's Formosa Petrochemicals Corp, for instance, sold an October-loading gasoil cargo at a record low cash discount as its refinery is running at 95 percent of capacity, traders said.

"We don't have any plans to reduce run rates yet as we have already prepared the feedstock and the price of feedstock is declining, but with margins also declining, it might be hard to sustain such high operating rates," a Formosa spokesman said.

The company might cut run rates in November if margins continue to deteriorate, although no decision has been taken yet, he added.

Brent crude fell on Monday to its lowest level since December 2010 because of rising supply and a weakening global economic outlook.

South Korean refiners are selling their diesel cargoes for about 30 percent lower than a month ago.

S-Oil Corp has sold a naphtha cargo for October loading at a discount of $12 a tonne to Japan quotes on a free-on-board (FOB) basis and SK Energy has sold a November-loading naphtha cargo at a discount of $15 a tonne, multi-year lows.

This contrasts sharply with the $53 a tonne premium S-Oil received for a March-loading cargo this year.

S-Oil Corp and Samsung Total Petrochemicals Co are maintaining their run-rates at just above 90 percent, while Hyundai Oilbank is holding its operating rate at about 80 percent of capacity for now, industry sources said.

Hyundai, the smallest refiner in South Korea, might consider lowering its throughput if middle distillate margins continue to hover between $12 and $14 a barrel above Dubai crude, a source said.

SK Energy, which is South Korea's top refiner, plans to keep its run rate in November the same as this month due to weak margins, even though a secondary unit is expected to be back from maintenance, a source familiar with the matter said.

"Refineries have to continue to sell, except for strategic stockpiling reasons like winter kerosene, so if the market continues to be bearish, the discount on cargoes will widen," a North Asian refining source said.

Refineries are also limited as to how much they are able to lower run rates as they would already be committed to lifting term crude oil cargoes and selling a certain volume of oil products.

"Crude price falls actually hurt the refiners as they would have bought the crude based on the previous month's prices while selling the refined oil products at this month's prices," a second North Asian trader said.

"The crude oil prices have been falling since June, so margins are very bad and refineries are losing money."

By Jessica Jaganathan and Seng Li Peng