The oil price rally so far this year was as much a result of tightening supply as it was a sign of oil demand growth holding resilient and defying doom-and-gloom forecasts of a significant slowdown due to faltering global economic growth and trade disputes.
With oil prices rallying more than 30 percent year to date, concerns started to emerge (again) that higher oil prices will begin to dampen demand in large oil-importing nations, especially in the key demand centers in Asia.
Yet, appetite for crude, be it in Asia or elsewhere, is dependent on more factors than the nominal price of crude oil. For refiners, it’s the refining margins—the profit they make from turning a barrel of crude into gasoline, diesel, or other refined oil products.
Therefore, crude oil demand is a direct consequence of refiners’ refining margins in various regions of the world, analysts tell Bloomberg.
At the end of 2018 and early 2019, refining margins weakened and some of those margins plunged into negative territory, weighed down by oversupply and flattening demand growth for some fuels in some regions.
Refining margins in Asia are expected to remain weak for several more weeks.
But with the upcoming summer peak demand in the northern hemisphere in the third quarter, margins are expected to recover from January lows and to further strengthen toward the end of the year, when refiners will have braced for the new shipping fuel regulations by the International Maritime Organization (IMO) to cap the sulfur content in fuels for ships as of January 1, 2020.
Refining margins in Asia in January 2019 fell to a more than two-year low of $2.75 per barrel, compared to an average of nearly $6 a barrel in the second half last year, according to data from Oil Analytics cited by Bloomberg. Gasoline refining margins in Asia have recovered to profit making in recent weeks, after they were in a loss-making territory at the beginning of the year, Bloomberg data shows. Related: The Giant Floating LNG Project You’ve Never Heard Of
In early December last year, oversupply sent Asian gasoline refining margins crashing to the lowest in seven years, with margins dragged further down by disappointing Chinese car sales and expectations of an economic slowdown.
At the same time, motor gasoline refining margins in the United States were very low or even negative, and these margins hit some of their lowest October/November levels in the past five years. The reasons for negative gasoline margins were flattening annual growth in gasoline demand and high levels of refined products output, the EIA said at end-November. On the other hand, strong growth in distillate demand drove up distillate prices and refining margins.
This year, refining margins are set to be weak for a few more weeks, before summer driving demand offers some support for transport fuel refining margins. Toward the end of the year, the IMO shipping fuel regulations are set to boost demand for lower-sulfur fuels and support middle distillates refining margins.
In its ‘Summer oil market outlook’ featured article in the Monthly Oil Market Report last week, OPEC said that “While US gasoline demand growth is expected to continue to slow, refining economics should remain well sustained, amid healthy exports.”
“Meanwhile, diesel demand for both transportation and the industrial sector will remain robust and jet fuel cracks are set to gain some upward momentum during the peak travel season across the globe,” according to the cartel.
In Asia, high gasoline inventories and recent refining capacity additions could continue to partially depress margins, OPEC says. Related: Oil Could Fall To $40 If OPEC Abandons Its Deal
“Even if gasoline markets both in Europe and in Asia were to see any significant upside, the lower global gasoline and diesel consumption baseline in the first quarter of this year point to a less optimistic outlook for product markets globally in the coming driving season,” OPEC noted.
The switch to lower-sulfur fuels, however, will be a boost to the global refining business, according to energy consultancy Wood Mackenzie.
“This switch in demand to lower-sulphur fuels from the shipping sector is good for refining,” Alan Gelder, VP Refining, Chemicals & Oil Markets at WoodMac wrote in an article at the end of January, discussing the prospects of the refining industry after a difficult 2018.
Although it’s early into the year, the major oil demand growth centers “are performing strongly,” the International Energy Agency (IEA) said in its April Oil Market Report last week.
“In China, the economy seems to be reacting to the government’s stimulus measures with purchasing managers’ indices increasing and export orders recovering, although there are signs that air cargo volumes might be falling. Preliminary oil demand numbers for the January-February period show solid growth of 410 kb/d year-on-year. Elsewhere, demand was strong in the same period, with India growing by 300 kb/d, and the US, which continues to be supported by the petrochemical sector, by 295 kb/d,” the IEA noted.
By Tsvetana Paraskova for Oilprice.com
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