Easwaran Kanason

Co - founder of NrgEdge
Last Updated: October 7, 2016
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Refining & Petrochem
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The refining industry in Asia will end the year on a very different note than it started. At the start of the year, Asian refining margins were comparatively strong, at least in comparison to Europe and North America. The healthy margins encouraged refiners to run at high utilization rates, aided initially by planned and unplanned outages across the region. Excess supply began to flow around Asia, depressing margins, which tumbled further as Chinese teapot refineries, allowed to import crude oil independently for the first time, significantly increased their processing. All that oil needs to go somewhere.

The positive net results of a low oil price environment have been absorbed by the supply-demand structure in most countries, with Chinese demand growth particularly being weak in line with its slowing economy. Indian demand has been quite robust (and refining utilization there high) but it is a lone bright spot in a sea of slow growth. With oil products in abundance and not enough outlets to absorb it, Asian refining margins sustained declines over the year, falling below breakeven point for all refining processing with the exception of hydroskimming by mid-year according to an analysis by McKinsey. 

In this environment, sharp movements in crude prices can have adverse effects. With crude now seemingly on the rise, thanks to the informal OPEC talks last week, Asian refining margins have now fallen even further. There is little cheer on the horizon as well. Summer gasoline seasonal demand now largely over – even China’s massive driving Golden Week season ends this week – so gasoline margins are under pressure. Naphtha is also weak, given several unexpected shutdowns of key petrochemicals plants – Formosa’s Changhua in Taiwan, Shell’s Pulau Bukom in Singapore and a couple in Japan – while the end of summer removes Middle East demand for fuel oil-powered cooling. Middle distillates are performing better, with refiners hoping for a cold winter to boost heating oil demand over the last quarter. 

And the situation might get worse. Gasoline is likely to stay in the doldrums, and a supply glut of naphtha is expected, with more naphtha expected to come from the Middle East and NLGs making inroads into Asian petrochemical production. Fuel oil is in a structural bad position, and only middle distillates are showing signs of improving over Q416. 

After a year that started positively, it looks like it will get more difficult from here on. Struggling with oversupply and weak demand growth, the last thing Asian refiners need right now is a dramatic spike in oil prices. The rest of the oil world might disagree, but crude oil prices at US$45/b are just about right for the refining industry in Asia. 

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