Asia Oil Refining Margins Climb, But a Peak Looms

The profit from turning a barrel of crude oil into refined fuels has hit a 13-month in Asia but there are signs that the rally may be starting to lose momentum.

The profit margin, or crack, for processing a barrel of Dubai crude at a typical Singapore refinery DUB-SIN-REF climbed to $15.05 on Wednesday, the highest since July 5, 2022.

The margin has rallied an astonishing 1,758% from the low in 2023 of $0.81 a barrel, hit on April 24.

The improvement has largely been driven by stronger demand for refined fuels across Asia as economies open up from the COVID-19 pandemic, with China's domestic demand leading the charge.

Margins have also been helped by the ability of refiners to pass on higher prices for refined fuels quickly, while still processing crude bought months in advance at lower prices.

However, the dynamics for refining in Asia may be changing in coming months.

The Chinese economy is struggling to regain growth momentum, with a run of soft data showing the challenges facing key sectors such as construction and manufacturing.

Other Asian economies are also losing momentum as higher interest rates dampen demand, with export-orientated countries such as South Korea and Vietnam facing challenges as consumer spending drops across both the developed and developing world.

Weaker economic growth is likely to cap demand for refined products, with the current high prices also serving as a disincentive to increased consumption.

It's also likely that the strong refining margins in Asia will attract refiners in China and India to maximise exports of fuels such as gasoline and diesel.

China's exports of refined products soared 17.7% in July to 5.31 million metric tons from June's 4.51 million, and were up 55.8% from 3.41 million in July 2022, according to official data.

It's likely that strength in China's fuel exports will extend into August, with commodity analysts Kpler estimating gasoline shipments will rise to 12.94 million barrels, up from 9.53 million in July and the highest since December.

India's exports of diesel in August to Asia's major fuel trading hub Singapore are expected to exceed 330,000 metric tons, the highest in 19 months, according to tracking services.

Between 330,000 and 413,000 metric tons of diesel is likely to head from India to Singapore in August, shiptracking data from Refinitiv, Vortexa and Kpler showed.

Cracks up
The Singapore refining margin GO10SGCKMc1 for 10 ppm sulphur gasoil, the building block for diesel and jet fuel, ended at $32.46 a barrel on Wednesday, up from $31.01 the previous close and near the eight-month high of $32.72, reached on Aug. 21.

The profit of turning a barrel of Brent crude into gasoline GL92-SIN-CRK ended at $20.71 on Wednesday, up sharply from the previous close of $16.83 and the highest since July last year.

The profit margins for refined fuels have risen in recent sessions largely because the price of crude oil has dropped more than the prices for refined fuels.

Brent crude futures LCOc1 ended at $83.21 a barrel on Wednesday, and have been on a declining trend since reaching an eight-month high of $88.10 on Aug. 10.

However, it's worth noting that Asian refiners will currently be processing crude they would have bought when prices were about $70-$75 a barrel, a range that persisted for most of May, June and July.

Crude prices rallied from July onwards as OPEC+ tightened supply, especially with the producer group's leading exporter Saudi Arabia announcing an additional 1 million barrel per day cut to its production.

Asian refiners have been seeking to buy more cargoes from producers outside the OPEC+ group, but even if they are successful, they are still facing the prospect of processing more expensive crude in coming months.

While refiners are likely to have hedged crude costs and product prices, they are still likely to face lower margins especially if China and India export more products and growth in fuel consumption slows amid softer Asian economies.

(Reuters - The opinions expressed here are those of the author, a columnist for Reuters. Editing by Robert Birsel)

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