The prompt quarterly Q1/Q2 2021 Singapore gasoil spread — an indication of near-term sentiment — averaged minus 45 cents/b throughout December, 2020 compared with the Q3/Q4 average spread of minus 27 cents/b over the same month. The Q3/Q4 spread has since narrowed further, and was assessed at minus 3 cents at the 0830 GMT Asian close Jan. 8.
Industry experts noted that many countries have fallen short of their initial mass vaccination targets, even as local transmission numbers have risen higher. Furthermore, the recent emergence of highly infectious variants of the coronavirus has injected fresh uncertainty into the gasoil demand outlook, sources said.
“The vaccination programs for many countries are falling behind schedule, so while demand for gasoil will surely grow this year, it’s more a question of by what extent or quantum this will be,” a trader said.
S&P Global Platts Analytics echoed similar sentiments, saying that while the baseline assumption considers that the vaccines’ effects on global economic activity will start to become apparent in second half 2021, there were still variables that would impact the pace of recovery.
“Platts Analytics expects Asia’s diesel demand, which is estimated to have dropped 2.7% year on year in 2020 to 9.8 million b/d, to bounce back by 3.2% year on year in 2021 as the economy in the region recovers,” said JY Lim, oil markets adviser at Platts Analytics.
“Over the last few weeks, however, some Asian countries are seeing more daily cases of COVID-19, and they have to be watched closely as the pace of the outbreak will have a direct bearing on the regional economic outlook and thereby oil demand, especially as the rollout of vaccines has been slow so far,” Lim added.
Market participants have also been mulling over regional supply balances which went through significant upheaval in 2020. Industry experts said the pandemic accelerated a wave of refinery closes and changed the global refining landscape, with several regional refiners forced to close or review operations due to poor refining margins.
BP’s plans to shut Australia’s largest refinery in Kwinana, as well as Pilipinas Shell Petroleum Corp’s plans to shutter its Tabangao-based refinery in the Philippines, will translate to higher import appetite from key demand centers. This will help offset a wave of new supply streams entering the market, sources said.
One example is China’s private greenfield 20 million mt/year Zhejiang Petroleum & Chemical, designed to produce 1.7 million mt/year of gasoil. In November 2020, the Chinese Ministry of Commerce granted export quotas to ZPC, adding the refiner to a fuel exporting list which had previously been restricted to only five state-owned companies. ZPC was allocated an export quota of 2,000,000 mt for oil products during the first round for 2021. Market participants also noted the private refiner’s output could be elevated in H2 2021 with the commencement of its 400,000 b/d Phase 2 project.
In addition, gasoil output from two refinery start-ups in the Persian Gulf — Saudi Arabia’s Jazan and Kuwait’s Al-Zour — are set to spill fresh barrels into the spot market.
Participants also opined that one of the constant themes brought over from 2020 into the new year could be the fact that refiners may choose to continue to run at lower rates due to dismal margins.
“There will be a global recovery for gasoil demand, but the question remains about margins, which are still low… that leads to questions about what forward margins are going to look like for more and more refineries, and will refiners continue to stay at reduced rates for longer?,” a Singapore-based trader said.
In a report published Jan. 6, Platts Analytics said that while gasoil cracks have steadily improved since early-November 2020, it remains statistically weak.
“Asian refining margins have been in negative territory for many months… [and] the regional surplus of capacity continues to affect product balances,” Platts Analytics said in a separate report released in December.
“Middle distillate stocks [have] remained high due to weak jet fuel demand and as refiners in the region continued to keep gasoil yield high… in 2021, there is still too much capacity chasing after too little demand,” the report said.