March 25, 2020 [Bloomberg – Published on March 20, 2020] – From multi-billion dollar mega complexes to simple distillation plants, Asian oil refiners are preparing for deeper operation cuts due to mounting losses from making fuel in an already oversupplied market.

 
Chinese, South Korean and Taiwanese refiners are deliberating further run-rate reductions as they struggle to find buyers for fuel amid a slump in domestic consumption and a lack of export options, said senior officials at the region’s processors with direct knowledge of crude procurement and fuel sales.
 
The dramatic plunge in oil triggered by the disintegration of OPEC+ and the ensuing price war has failed to lift the profitability of refiners. That’s because the pump-at-will strategy has caused freight rates to skyrocket, erasing much of the benefit of lower crude costs, while the global demand outlook worsens.
 
Faced with a tepid recovery in local consumption and swelling stockpiles, Chinese processors are now contending with weak prices at hubs such as Singapore, making exports unprofitable. South Korean refiners that typically send excess jet fuel and diesel to Europe and Africa are also being confronted by a glut in what’s traditionally been the market of last resort.
 
For South China plants, margins for exporting gasoline and diesel to Singapore have been negative for two weeks and currently stand at 1,252 yuan ($176.59) and 464 yuan per ton, respectively, said Jiang Na, an analyst at industry consultant JLC.
 
The price differential is exacerbated by Chinese government policy, which sets a $40 a barrel floor for crude, while Singaporean prices are more responsive to international markets, she said.

Asian processors were among the first to slash run rates and shut down facilities in early-February due to the impact of the coronavirus on regional fuel demand. Now, with the virus spreading rapidly in Europe and the U.S., demand for everything from aviation fuel to gasoline is taking another big hit.

At least two of the refinery officials that Bloomberg spoke to were also considering optimization at their plants, including reducing output of gasoline — one of the worst-hit fuels — in favor of higher-value products.

“We are losing $4 in making gasoline, demand is drying up,” said Sanjiv Singh, chairman of Indian Oil Corp. “We haven’t cut refinery runs yet, but if the situation persists for a couple of months, we won’t have any option but to do so.”

Complex refining margins in Singapore fell to a loss of more than $2 a barrel, the lowest since at least 2008, in the Asian oil-trading hub earlier this week, data from Oil Analytics show. On a seasonally adjusted basis, current returns are more than $5 a barrel below the five-year average for this time of the year.

“The plummet in oil demand and surge in supply are likely to individually be the worst of their kind; their synchronization will lead to the most oversupplied oil market in the modern era,” Jefferies LLC analysts Jason Gammel and Jamie Franklin wrote in a note. Refining margins are likely to get much worse before they recover and refinery run cuts seem inevitable, they said.
 

Desperate Times

In a sign of desperation, a handful of companies are also inquiring about ships for the purpose of storing fuel at sea. While this approach can be profitable when vessel rates are low and prompt supplies are at a deep discount to delayed shipments, the floating storage trade is currently loss-making due to the very high cost of booking tankers, according to traders and Bloomberg calculations.

Nevertheless, up to five companies have been seeking vessels this week, with several bookings made for delivery to Europe so far, according to fixtures. Between five and 10 supertankers, including a vessel named Europe that can hold up to 3 million barrels, have been booked for storage.

Unipec, China’s biggest oil trader, tried to get out of loading as many as eight supertankers of crude from the Middle East next month, citing the impact of high freight rates on its cost and margins. The company, which procures oil for Sinopec, said its parent was planning to reduce crude processing at its refineries in May due to suppressed fuel demand, people with knowledge of the processor’s plans said.

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