This is the 13th 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 short and medium term.
In this edition:
- In Focus – Asian petrochemical margins are set to come under pressure due to a combination of softening consumer demand and an increase in supplies of the various building blocks of plastic resins. The US will add 6.61 Mtpy of new ethylene capacity through the end of 2020, all of which is devoted to on-site polyethylene units, while China is set to bring into service 2.31 Mtpy of PDH plants, 4.35 Mtpy of alkylation units, and 3.55 Mtpy of ethylene units this year alone. At the same time, the ongoing US-China trade war is weighing on consumer sentiment and putting the incoming global slate of new resins production at risk.
- In Focus – China’s stockbuilds: Chinese crude imports have been vast since Q4 18, with implied data showing sizable stockbuilds. Part of this is independent refiners sourcing crude to exhaust licences, but much of it is due to new storage capacity coming online. Our calculations suggest 76 mb of new capacity has entered service in Q4 18 and Q1 19, and as much as 92 mb is set to come online later in the year. As a result, China’s current storage utilisation—filled storage as a percentage of total capacity—is fairly low at 44%, compared to a peak of more than 55% in 2016. Chinese stocks are therefore not nearly as high in operational terms as the market believes, suggesting there is room to buy more and even to build more. Together with new refinery start-ups, we estimate China’s net crude short will average at least 9.6 mb/d in H2 19, almost 1 mb/d higher y/y.
- Macroeconomic outlook: Demand has been at the forefront of the market’s concerns due to the ongoing US-China trade spat, but the latest economic data out of China suggest the worst may be behind us. Moreover, several Southeast Asian governments are also moving into expansionary mode, hiking spending this year to cushion the negative effect of trade tensions and ahead of key elections. With Q1 19 demand in Asia coming in better than expected and China’s economy picking up, we have raised our 2019 global demand growth estimates to 1.1 mb/d from 1 mb/d previously, with further upside risk if economic growth picks up more broadly in Asia.
- Outlook for oil products: Asian refiners are facing a double whammy of slowing oil demand growth and new supplies from some 1.74 mb/d of new refining capacity that is ramping up this year. The biggest pressure on refining margins will come from light ends, particularly gasoline, as the new refineries in China, Malaysia and Brunei are gasoline machines. There are already signs that China, much like Korea, is starting to push gasoline exports outside of Asia. The final nail in the coffin will be a 50% reduction in Malaysia’s net gasoline imports—the fourth-largest gasoline short in the region—once the 0.3 mb/d RAPID refinery hits full capacity by late 2019.
- Outlook for crude: If China’s crude appetite remains robust, we expect East of Suez sours to rally further—after underperforming in Q1 19—especially with the Trump administration deciding to not grant waivers to Iranian crude buyers. Softening fuel oil markets and a gasoline bounce has supported lights, though as Q2 19 progresses, demand for cooling across the Middle East will give fuel oil a boost, while gasoline should soften as runs pick up ahead of summer. This should support a gradual narrowing in Brent-Dubai over Q2 19.
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.