21 October 2016, Singapore — From sharp cuts to Chinese oil production to falling inventories of refined fuel products, signs are mounting that Asia’s oil markets are slowly returning to balance.
Global inventories of refined products – made up from light and middle distillates like gasoline and diesel, as well as residual fuel such as fuel oil – have all fallen since the beginning of the month. They are now at or below levels seen this time last year, data in Thomson Reuters Datastream shows.
The drawdowns come after China, Asia’s biggest oil consumer and a top-5 global producer, this week reported a 9.8 percent fall in output for September, amounting to one of the deepest cuts on the record.
The falling stocks in most oil trading hubs, including Singapore, Europe’s ARA (Amsterdam, Rotterdam, Antwerp), and in the United States, as well as China’s declining production, are signs of a market coming closer into balance following two years of consistent crude and refined product oversupply.
“The oil products market is in the midst of rebalancing – it started in the U.S. and Europe a few months back, and in Asia, the rebalancing is starting to show,” said Nevyn Nah of energy consulting firm Energy Aspects.
Despite a slight increase over the past week, Singapore’s refined product stocks have fallen from over 58 million barrels last May to below 50 million barrels, according to government data.
“After two years of oversupply and sharply rising inventories, inventories may have peaked as supply and demand comes back into balance,” Neil Beveridge of Bernstein Energy said on Friday in a note to clients.
Analysts said the tighter markets were a result of both strengthening demand and tightening supplies.
From Glut to Squeeze?
A tightening fuel market is also visible in Singapore’s refinery margins, which have improved despite rising feedstock crude prices.
Gasoline profits have soared from just $1.70 per barrel in July to almost $10, while overall Singapore refinery margins started picking up in August and have since jumped from $2.50 a barrel to around $6.20.
“The net result of these developments implies that prices could have further to run as markets tighten,” said Bernstein’s Beveridge, who expected crude prices to average $60 per barrel in 2017 and $70 a barrel in 2018.
Given strong demand, especially in Asia, and tightening supplies, “there could be a substantial supply shortfall in 2017 which could go a long way to draining inventories,” he added.
Yet for the moment, traders say Asia’s markets are still some way off a squeeze.
China’s gasoline and diesel exports, which contributed heavily to Asia’s refined product glut, jumped again in September, customs data showed on Friday, as its refiners continue to produce more fuel than China consumes.
And with the refinery maintenance season coming to an end soon, refined product supplies will soon start to pick up.
*Jane Chung; Henning Gloystein; Editing – Richard Pullin – Reuters