This is the 11th 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 – China’s domestic product markets. Despite concerns of slowing economic growth amid the escalating US-China trade war, China’s domestic product markets are surprisingly tight. This is due to a combination of better-than-expected demand—especially for the middle and bottom end of the barrel—and reduced supplies from independent refiners and blenders. The supply-demand mismatch has also been exacerbated by a shift to China VI earlier than expected in some provinces, leading to octane shortages. As a result, we expect Chinese product exports to remain weak in October before picking up slightly in November and December, following a final round of quotas.
- In Focus – the Iran sanctions: Following the US administration’s announcement that it would reintroduce sanctions on Iranian oil, exports from the country have steadily decreased as Asian buyers, including China and India, seek to avoid a standoff with Washington. We expect Iranian exports to drop by just under 2 mb/d from average 2017 levels, taking them below 1 mb/d by year-end. But while the market has focussed on crude, US sanctions are also likely to reduce Iran’s exports of fuel oil—smuggling of the prized 280 cst Iranian grade is set to be far less widespread this time around—as well as Iran’s gasoline imports.
- Macroeconomic outlook: We reassess the outlook for Pakistan, following the election of Imran Khan as president. The Pakistani economy is facing a major test from ballooning fiscal and current account deficits, and the new government has pledged to reduce its large ‘circular debt’ by repairing the ageing transmission network and limiting distribution losses. Meanwhile, investments in coal- and gas-fired power generation will continue, suggesting a continued fall in Pakistan’s fuel oil consumption in the coming years, while an austerity drive could weigh on diesel and gasoline demand growth.
- Outlook for oil products: IMO remains front and centre of market concerns and in this chapter, we explore the outlook for diesel production in the region. Using a statistical analysis of historical diesel yields, we explore the diesel yield envelope in the region considering completed or upcoming refinery upgrades. As fuel specifications for MGO are much looser than on-road diesel, producing on-spec distillate fuels is easier. But Asian refiners will still need to start maximising diesel yields. We expect Asian refinery runs to rise y/y by 0.90 mb/d in 2019 and by 0.81 mb/d in 2020, suggesting that Asian distillate supplies are set to rise by 1.83 mb/d collectively across 2019 and 2020.
- Outlook for crude: The imminent loss of Iranian barrels sent sour differentials for October and November loaders soaring in the east. But some of the physical crude strength started to ease from the December cycle as Asian refiners likely overbought ahead of sanctions and Chinese teapots have exhausted their licences for the year. The key change in Asian balances was India deciding to lift 9 mb of Iranian crude for November. The loss of Iranian barrels is positive for Dubai timespreads and should ultimately help Brent spreads too, but the uncertainty around where and by how much US exports will swing makes it impossible to have a strong view on forward Brent spreads, unless Brent-Dubai weakens.
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.