Asian refiners prefer OPEC+ to extend crude output cuts amid weak cracks, inventory losses

Asian refiners would prefer to see OPEC and its alliance extend the group's production cuts through the second half of 2024, as stability in oil prices and margins were the Asian refining industry's primary focus rather than crude supply security, refinery sources said over May 24-29.

The ongoing geopolitical tensions in the Middle East and the prolonged OPEC+ production cuts have hardly caused any crude and feedstock supply shortfalls or disruptions in Asia. The Asian refining industry is growing numb to geopolitical issues involving Israel and Iran, while the biggest focus for refiners in the region is crack spreads, refining margins and inventory valuation, according to feedstock managers and middle distillate marketers at Thai, Japanese, South Korean, Chinese and Indian refiners.

Despite initial concerns, the Israel-Iran conflict, OPEC+ production control, sanctions against Russia and Iran, as well as Red Sea maritime security issues, have hardly caused crude supply disruptions for Asian refiners. Oil price stability and refining margins are the key agendas for Asia heading into the next key OPEC+ meeting, according to product marketers, feedstock managers and officials at various Asian refiners, including Bharat Petroleum Corp. Ltd., Thai Oil, ENEOS and S-Oil.

The next OPEC+ ministerial meeting will take place June 2 via video conference. The group of oil-producing nations is set to discuss output policy in H2 2024.

"Price stability is everything, and the current OPEC+ supply control stance should be maintained because Asian refiners don't wish to see prices either falling or rising too much and too fast ... Sharp volatility in prices typically works against overall refining margins," a linear programming model strategist at a major South Korean refiner said.

"Lower oil prices don't necessarily work in favor of Asian refiners ... Yes, when we can buy feedstock crude and condensate cheaply, that is good, but lower prices would also lead to inventory valuation losses, and product sales margins can also take a hit when [Platts Singapore] benchmark middle distillate [outright] prices trend sharply lower," a feedstock and logistics management source at a state-run Thai refiner said.

Although the hedging department actively takes positions in derivatives and forward curve time spread instruments, lower oil prices can often negatively impact product margins and sales, a marketing manager at Japan's Cosmo Oil said.

Cosmo Oil indicated that in the fiscal year 2023-24 (April-March), it posted net sales of Yen 2,445.6 billion ($15.5 billion), down Yen 5.9 billion from a year earlier, mainly due to a fall in crude oil prices from the previous year.

Tepid cracks, margins

The most ideal outcome from the June 2 OPEC+ meeting would be for the group to largely maintain their current production stance, as any surprises that may cause prices to trend sharply in either direction in the second half could hurt Asia's oil demand and refining margins, refinery and trade sources said.

Overall economic activity in Asia has been weaker than anticipated so far this year, with a tepid construction sector in China, a dismal manufacturing segment in South Korea and Japan, as well as a recent slowdown in tourism in Southeast Asia after major holiday periods weighed on oil demand, ultimately putting pressure on light and middle distillate crack spreads.

Weakness in Asia's industrial fuel demand dragged down the gasoil/diesel crack spread, with the Platts-assessed FOB Singapore 10 ppm sulfur gasoil cargo crack spread against front-month cash Dubai -- a measure of the product's relative strength to the crude it is refined from -- at $14,49/b at the May 29 Asian close, narrowing from the April average of $16.83/b, S&P Global Commodity Insights data showed.

Additionally, oversupply of aviation fuel in the Asian market and weak jet fuel cracks also raised concerns among export-oriented refiners across Asia, with South Korean and Indian refiners hoping for OPEC+ to maintain their tight crude output strategy to achieve an adequate supply-demand balance.

Platts assessed the second-month jet fuel/kerosene crack against Dubai crude swaps at an average of $15.3/b quarter to date in the second quarter of 2024, lower than the Q1 average of $20.39/b and Q4 2023 average of $22.67/b, Commodity Insights data showed.

South Korea's domestic refining margins have been declining since February, and export margins have not been ideal in the past few trading cycles. If OPEC+ can at least maintain their tight output stance, the oversupply of some oil products in Asia could ease a little over time, an official at a major South Korean refiner said.

Crude supply security

When asked about Middle Eastern crude procurement in times of geopolitical uncertainties, most refiners across East Asia said they have little to no issue securing monthly term barrels from major Persian Gulf suppliers, while spot purchase options were also plentiful.

In addition, OPEC+ cuts have never caused any shortage in Asian refiners' crude procurement, owing largely to China and India continuing to take large volumes of politically sensitive Russian and Iranian oil, leaving ample Persian Gulf sour crude supply for Japan, South Korea, Thailand, Taiwan and other key Asian buyers to take, refinery and trade sources said.

"I don't think Asia is seriously worried about crude supply security ... The Israel-Iran situation and OPEC+ cuts are no longer a [supply risk] concern," a feedstock manager at a Taiwanese refiner said.

"As long as China and India continue to take Russian barrels, there will be a good balance in Middle Eastern crude trades and distribution for East Asian refiners," the feedstock manager added.

Data from S&P Global Commodities at Sea showed total Russian seaborne crude exports reached 3.9 million-4 million b/d in March and April, boosted by multimonth high shipments to India.

Russia is China's top crude supplier so far this year, with Asia's biggest crude importer taking 37.79 million mt from the non-OPEC producer in the first four months, up 16.6% from a year earlier, according to the latest data from China's General Administration of Customs.