This is the 10th 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 – price and income elasticities of Asian oil demand. We argue that higher oil prices are unlikely to severely dent Asian oil demand growth as income-effects massively outweigh price-effects, and subsidies will weaken the feed-through from crude prices to demand. The Asian income elasticity of demand (YED) fits the preconceived wisdom that adjustments to income are strongly and positively correlated with changes to demand, with 10-year average YED at +0.6.
- In Focus – Asian refining margins: Asian refining margins are set to come under significant pressure in H1 19 with the start of three new mega-refineries in Asia in late 2018. With combined capacity of over 1 mb/d, these light end machines are set to produce almost 0.3 mb/d of gasoline, spelling trouble for gasoline markets in 2019. Diesel will also struggle in H1 19 as supplies will rise well before demand does for IMO 2020, and ultimately diesel may only benefit for a year or so before VSLFO demand rises.
- Macroeconomic outlook: The risk of a fully-fledged US-China trade war is inching closer with every additional threat or announcement of items to be taxed. While negotiations are still possible, they seem unlikely before the US midterm elections in November. In the interim, energy markets are bracing for a rough ride. August loadings of US crude to China have ground to a halt, and if—or perhaps when—implemented, a 25% tariff suggests US crudes will have to discount to find a home in China and elsewhere in Asia. But beyond US-China energy trade, the risks of a trade war are clouding the outlook for global oil demand growth more broadly.
- Outlook for oil products: China’s latest environmental blueprint, the Blue Sky Protection Campaign, will introduce stricter limitations on sulphur content in marine fuels starting 1 January 2019. China’s expedited timeline means that it will be IMO compliant by 2020, and its fuel oil demand will halve from 2018 levels. At the same time, the boost for diesel demand will offset losses from electric buses and LNG trucks.
- Outlook for crude: Sour crudes are set to strengthen in Q4 18, as long as China does not absorb all the Iranian crude backed out by other countries and once the mismatch in timing between Saudi Arabia and its allies pre-emptively ramping up supply before Iranian output has actually fallen irons itself out. Brent-Dubai spreads continue to narrow sharply in the near-term but will widen out again in Q4 18 as global crude fundamentals improve. If China chooses to buy more Forties crude to replace US imports—a trend that has just begun—then Brent-Dubai can widen out prior to Q4 18.
The Asia Pacific Quarterly also provides a unique, comprehensive overview of developments in the downstream sector 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.