Refiners Struggle as Asia Drowns in Gasoline

Singapore light distillate stocks near record; refiners see no quick improvements in profit margins.

Asia's refined product markets are being swamped by a wave of gasoline as a long-lasting crude oil glut spills into the one fuel market refiners had hoped would save them, ruining margins and dragging down share prices across the region.

Singapore's benchmark gasoline margins - long the bright spot for Asia's oil processors amid rock-bottom profits earned on diesel, jet and shipping fuel - have more than halved since the beginning of 2016, when they were near at least a seven-year high for first-quarter values. <GL92-SIN-CRK>

With gasoline's slump, overall refining margins in Singapore have dropped nearly 60 percent since the beginning of the year, buckling under the weight of the fuel products pumped out of oil plants as refiners feasted on crude prices that were as low as three-quarters of their mid-2014 levels. <DUB-SIN-REF>

Besides dragging down crude refiners' share prices, this drop in margins could also undercut global oil prices that have struggled up from 12-year lows hit early this year, and refiners say the situation will not improve anytime soon.

"We don't expect 2016 refining margins to improve. In fact, the situation could worsen from second-half of 2016 as the peak maintenance season in Asia will be over," said KY Lin, spokesman for Formosa Petrochemical Corp, meaning that more fuel would hit the market once shutdown refineries restart.

In a sign of just how bloated the market has become, Singapore's light distillate stocks, which includes gasoline, hit nearly 16 million barrels late last month, the highest on record, according to government figures. The stocks have dropped back since, but there's still enough gasoline in the tanks to fill up almost 50 million average-sized vehicles.

Lin said some of the main contributors to the gasoline glut have been private Chinese refiners, known as "teapots", that have started exporting their surplus petrol, overwhelming demand.

The collapsing margins are a sharp reversal from expectations of a few months ago. Just in February South Korea's SK Innovation, a major Asian refiner, said its margins would remain strong as demand for gasoline and naphtha offset weaker markets for other fuels.

Formosa Petrochemical operates a 540,000 barrels per day (bpd) refinery in Mailiao, Taiwan, the island's largest and one of the 10 biggest in Asia. Formosa produces about 3 million barrels of gasoline a month, over half of which it usually exports.

FUEL STOCKS UP, EQUITY STOCKS DOWN
The impact of tumbling refining profits has been reflected in the stock markets.

The market capitalization of SK Innovation has fallen by half a billion dollars in the last three weeks to 14.6 trillion won ($12.5 billion) as its share prices dropped by 15 percent.

The trend has been similar for Formosa Petrochemical and others - such as Japan's major refiners JX Holdings (JXHGF), TonenGeneral, Cosmo Energy and Idemitsu Kosan - with shares down between 5-10 percent so far in May.

The slumping processing profits are fallout from a crude glut that emerged in 2014 as exporters around the world raced to ramp up output in a fight for Asian market share.

With daily output last year eventually exceeding demand by as much as 2 million bpd, crude prices fell by around 75 percent between mid-2014 and early 2016.

This was a signal for refiners to ramp up operating rates across Asia to profit from still strong demand for fuel, especially from China and India.

"That caused global oversupply and refining margins to tumble as demand couldn't (keep) supporting the increasing supply," said Kim Woo-kyung, an SK Innovation spokeswoman, adding that her company now had high volumes of unsold fuel.

By Henning Gloystein