Red-hot refining margins in Asia start to cool as demand eases

SINGAPORE (BLOOMBERG) – Asia’s red-hot fuel markets are cooling off as demand starts to ease while refiners keep processing rates high, dragging down the industry’s margins across the region.

Returns from processing petrol in Asia have sunk more than 60 per cent from the record hit in June, while those for diesel have fallen about 25 per cent, according to data compiled by Bloomberg.

There may be further declines this quarter as refiners return from maintenance and new capacity comes online, boosting fuel supplies, FGE has forecast.

The retracement adds to signs commodities are coming back down to earth, signalling some relief for governments and motorists that have struggled with surging fuel inflation. Global oil benchmark Brent has sunk back near US$100 a barrel, well down from a peak near US$140 in March after Russia’s invasion of Ukraine upended markets.

“Fuel demand in South-east Asia already is feeling the pain from higher prices,” said analyst Emma Li at Vortexa. In addition, Japanese and South Korean processors have raised utilisation rates and an arbitrage window for diesel sales to Europe closed, driving an imbalance in regional supply and demand, she added.

In Asia, factory activity in economies such as South Korea, India and Thailand slowed in June as inflation surged. Imports of petrol and diesel across South and South-east Asia fell 18 per cent that month compared with May, according to Vortexa data.

Despite margins falling, they are still historically high, especially for diesel, prompting refiners to keep processing as much oil as possible. Utilisation rates in Asia are estimated to expand by 2.8 percentage points through August, over the 80 per cent seen in June, according to FGE.

The consultant expects the region’s petrol market to flip to a glut next month while a diesel surplus expands. The combination of weaker consumption and rising supplies is offsetting the impact of lower fuel exports from China, and potentially from India.

China’s allowances this year are about 40 per cent below the volumes at this point in 2021. India recently imposed a tax on flows, spurring expectations for a modest decline in exports.