This is the ninth edition of our Asia Pacific Quarterly, which provides detailed analysis of Asian crude and product markets. It covers the economic and political trends shaping demand and supply patterns in the region and draws on our wealth of expertise in global oil and products markets as well as the region itself, from Northeast Asia to South Asia. Each quarter, Focus pieces delve into key issues that will impact the market in the near- and medium-term.
In this edition:
- In Focus – Malaysia’s oil demand unpacked. In this first focus piece, we delve into the country’s notoriously challenging data sets to analyse the oil demand patterns of Asia’s fourth-largest gasoline short, and how the start-up of the 0.3 mb/d RAPID refinery in 2019 is set to shake up Asian regional balances. We expect that the new refinery will reduce but not eliminate the country’s gasoline short, while a sizeable diesel yield and virtually zero fuel oil production will put Malaysia in a competitive position not only for its own targets for Euro V but also for the IMO 2020 ruling.
- In Focus – China according to Xi Jinping: Following a momentous leadership transition, Xi Jinping is now the most powerful Chinese leader in decades. His policy preferences will shape China’s economic and energy policies for years to come. Xi’s administration is committing to economic restructuring and focussing on the environment, suggesting that China’s economic and oil demand growth will both slow in 2018 and in the coming years. The government will continue to fight pollution, which will weigh on industrial demand and refinery runs, while also supporting the electrification of the vehicle fleet. But Xi’s ambitions also extend well beyond China. In this vein, China’s baby steps on the Shanghai crude futures contract will lay the foundations for a new crude benchmark.
- Macroeconomic outlook: Markets have been spooked by the risk of a US-China trade war, which would resonate across a host of Asian economies given their heavy investments in China and the integrated nature of global supply chains. But while concerns over trade wars are pertinent, the reality remains one of an improved economic outlook due to rising connectivity. China continues to expand infrastructure building through the Belt and Road Initiative, which will be supportive of regional oil demand, particularly for diesel in the short- to medium-term.
- Outlook for oil products: The impact of China’s focus on the environment also has widespread implications for the country’s refinery runs and product export quotas—which by extension, shape regional and increasingly global products cracks. A massive allocation of export quotas in Q1 18 generated record product outflows, but changes to the tax-collecting scheme are raising operating costs for the teapots which, combined with tighter environmental protection and limitations on export quotas, will cap the extent of runs and thus products export growth for now.
- Outlook for crude: Middle Eastern sour crudes are in for a volatile ride. A number of Asian mega-refineries are starting up later this year—in China, Vietnam, Malaysia and possibly Brunei—supporting demand for Middle Eastern medium sour crudes, designed to be these plants’ baseload. This uptick in demand for sour crudes will create volatility in Brent-Dubai spreads and will pose a conundrum for OPEC, especially should it decide to continue curbing production in 2019. The strength in demand for imported sours will be exacerbated by falling crude output in Asia and ongoing stockpiling. But the upside for sour crudes will be tempered by the onset of IMO 2020 which will weigh on fuel oil cracks.
The Asia Pacific Quarterly also provides a unique, comprehensive overview of developments in the downstream and their implications for crude and product trade flows, SPR builds, refinery runs and yields, as well as an outlook for the region’s crude oil production.