The drop in refinery profits is being led by a contracting margin for gasoil, the base for diesel and jet fuel, with 10 ppm gasoil margin dropping for a seventh session on Monday. The margin declined to $14.25 a barrel on Monday, the lowest since January 2022 and down 63% from the peak so far in 2023 of $38.89 on Jan. 25. Given diesel is mainly used as a heavy vehicle transport and industrial fuel, falling margins indicate that sectors such as construction and manufacturing may be starting to come under pressure. It is not just gasoil that is being affected, with the margin on gasoline also dropping. The profit from turning a barrel of Brent crude into the light motor transport fuel in Singapore slid to $12.03 on Monday, the weakest since March 7 and down 38% from the peak so far in 2023 of $19.32 on March 30. The falling margins on refined fuels may result in refiners in Asia processing less, especially as crude costs continue to rise. The April 2 announcement by OPEC+, the group consisting of the Organization of the Petroleum Exporting Countries and allies including Russia, that they would cut a further 1.16 million barrels per day (bpd) of output from May has boosted oil prices. Global benchmark Brent futures ended at $84.76 a barrel on Monday, having held onto the gains of about $5 a barrel made in the wake of the OPEC+ production decision.
CRUDE COSTS
The cost of some physical crude for Asian refiners has also
risen after top exporter Saudi Arabia hiked its official selling
prices (OSPs) for May-loading cargoes for a third straight
month.
The OSP for the kingdom's benchmark Arab Light blend was
raised to a premium of $2.80 a barrel over the Oman/Dubai, up 30
cents from April-loading cargoes.
Saudi Arabia's pricing moves tend to be followed by other
major Middle East exporters, thereby affecting the bulk of
seaborne crude shipped to Asian customers.
The question for the crude market is whether Asia's refiners
will start to cut throughput in response to the higher crude
price and weaker margins on refined products.
It is likely that they will first try to buy cheaper oil
from non-OPEC producers such as the U.S., as well as seeking
discounted Russian oil that can no longer be sold to Europe.
But if margins continue to come under pressure, refiners are
likely to lower output in a bid to drive product prices higher.
The problem is that with the global economy starting to look
weak outside of China, higher fuel prices may exacerbate the
slowdown and raise recession risks.
Despite the current problems facing refiners, both OPEC and
the International Energy Agency (IEA) are sticking to bullish
forecasts for crude demand growth in 2023.
However, these are now largely centred on strong demand in
the second half of 2023, led by China, with the IEA predicting
global oil demand will rise an overall 2 million bpd in 2023.
The IEA does acknowledge the risk to economic growth from
rising fuel prices amid an anticipated shortfall in crude supply
in the second half of the year.
But it seems the agency is expecting, or perhaps hoping,
that supply constraints may be eased rather than demand being
destroyed by a weakening global economy.
OPEC is also maintaining a bullish view for 2023 oil demand
growth, keeping its forecast for an increase of 2.32 million bpd
in its latest monthly report.
But the group also highlighted downside risk to oil demand
in the northern summer as a result of weakness in developed
economies, which are still battling high inflation and the
impact of tighter monetary policy.
The main risk to the IEA and OPEC forecasts would appear to
be what impact the relatively high price of crude will have on
the forecast surge in demand in the second half of 2023.
If OPEC+ is successful at keeping crude prices above $80 a
barrel, it should serve to undermine the bullish growth
forecasts as more and more economies experience slowing growth
and tip toward recession.
The opinions expressed here are those of the author, a columnist
for Reuters.
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GRAPHIC-Asia refining margin vs Brent crude price: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Editing by Himani Sarkar)
