Asian refiners generally expect oil prices to continue their downtrend for the remainder of the year; however, geopolitical tensions in the Middle East could slow the pace of decline, enabling them to better manage their price hedging positions and protect their inventory valuations.
The downtrend in oil prices so far this year has hurt refiners’ inventory valuations while hedging costs have risen. However, market speculation and the risk of potential supply disruptions amid the Israel-Iran conflict have prevented prices from falling too drastically, industry and trade sources said over Oct. 8-10.
Lower oil prices do not necessarily work in favor of Asian refiners. A sharp decline in prices can negatively impact the valuation of feedstocks purchased and oil products produced weeks or months earlier, while hedging costs rise to cover the significant drop in outright settlement prices for forward-month oil and chemical product term and spot sales, according to middle distillate traders at Japanese and Thai refiners, as well as feedstock managers at South Korean refiners.
The ideal scenario for Asian refiners is for crude oil prices to remain within the $75-$85/b range in the second half of the year. Price stability would protect inventory valuations, eliminate unnecessary hedging costs and position sizes, as well as reduce volatility in refining margins, refinery sources and traders said.
“Considering the lackluster Chinese oil demand this year, on top of tepid industrial fuel demand in many key East Asian economies, oil prices would remain under pressure … But the prices aren’t taking a free fall thanks to the Israel-Iran issues, and that is rather positive for refiners and petrochemical makers in Asia,” a feedstock manager at Hanwha TotalEnergies said.
“When outright prices trend down and trend down sharply, [a refinery hedging department] often needs to take more paper and forward curve positions, as well as increase the [hedging] lot sizes … When [Brent] futures broke below $70/b not so long ago, I am sure there were many who couldn’t sleep properly at night because the bulk of them were bought when prices were above $80/b,” a market analyst at a major Japanese integrated trading company said.
Many regional refiners posted inventory gains in the second quarter, largely due to higher oil prices during that period. Thailand’s state-run PTT reported an inventory valuation profit of Baht 2.77 billion (about $83 million), while Japan’s Idemitsu Kosan recorded Yen 4.7 billion (around $31.7 million) in stock valuation gains for the April-June quarter.
Platts, part of S&P Global Commodity Insights, assessed the physical Middle Eastern sour crude benchmark Cash Dubai at an average of $85.34/b in Q2, higher than Q1’s average of $81.22/b.
However, refiners are expected to report losses on stock valuations in the second half of the year if benchmark crude and oil product prices continue their recent downtrend.
Platts assessed Cash Dubai at $77.435/b on Oct. 9, rebounding after reaching an 18-month low of $70.77/b on Oct. 2, yet still significantly lower than the year-to-date high of $90.89/b on April 11 and below the H1 average of $83.26/b.
Bigger concerns over margins
Middle distillate marketers and feedstock managers at major Asian refiners indicated that their primary focus is on fragile refining margins and demand fundamentals rather than crude supply issues.
Refiners across Asia are generally confident that the Iran-Israel conflict will not disrupt crude flows from the Persian Gulf to Asia; however, expensive tanker insurance fees for these deliveries due to geopolitical tensions in the Middle East could erode overall refining margins.
Additionally, lackluster industrial fuel demand in key Asian economies is putting pressure on crack spreads, refinery sources and product marketers said.
“The actual physical supply and trade flows [of Middle Eastern crude for Asia] are unlikely to be disrupted, as Iran and Israel would probably look to keep the damages and violence to themselves, but [Asian refiners’] key concern is the elevated shipping costs hurting overall refining margins,” a feedstock and logistics manager at a major South Korean refiner said.
While the Asian refining industry is closely monitoring the geopolitical situation in the Middle East, the market is primarily focused on whether regional demand can absorb the higher South Korean oil product supplies this year, along with Chinese clean product offers following the release of China’s export quotas in September, refinery sources and analysts said.
Weak construction and real estate sectors in key East Asian economies are expected to negatively impact gasoil/diesel cracks and petrochemical margins as the trading cycle shifts toward the low gasoline demand winter season, according to a middle distillate sales manager at a state-run Thai refiner and analysts at the Korea Petroleum Association.
Platts assessed the second-month Singapore gasoil swap crack against Dubai crude swaps at an average of $15.58/b in H2 so far, compared with $19.35/b in H1 and $22.82/b in 2023.
