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Viewpoint: Asian gasoil market shows signs of strength

27 Dec 2017 05:26 GMT
Viewpoint: Asian gasoil market shows signs of strength

Singapore, 27 December (Argus) — Asia-Pacific term gasoil deals have been agreed at higher levels in 2018, indicating a firmer market for the 10ppm sulphur grade. But rising regional supplies may erode the impact of strengthening demand.

Taiwanese private-sector refiner Formosa and its South Korean counterparts Hyundai Oilbank, GS Caltex, Hanwha, SK Energy and S-Oil have all agreed their 2018 gasoil term contracts at higher cash differentials compared to 2017, after taking into account a change in the pricing benchmark to the 10ppm sulphur grade in place of 500ppm sulphur.

Formosa will sell its 500ppm sulphur gasoil term supplies in 2018 at around a discount of $0.65/bl to Singapore 10ppm sulphur gasoil spot assessments, the new industry pricing benchmark that takes effect on 2 January. This is higher than the firm's 2017 term contract for 500ppm sulphur gasoil, which was concluded at parity to Singapore 500ppm sulphur gasoil. The details — together with confirmation of all the term agreements — could not be confirmed with the companies involved.

The Taiwanese refiner also agreed its 2018 contract for 10ppm sulphur gasoil at a premium of just above $0.20/bl to Singapore 10ppm sulphur gasoil spot assessments, which is also likely stronger than the $0.55/bl premium to Singapore 500ppm sulphur gasoil spot assessments that Formosa achieved for its 2017 supplies of the grade.

South Korean refiners have also settled 2018 term gasoil contracts at generally higher cash differentials than for supplies this year. Hyundai will sell term 10ppm sulphur gasoil at a discount of $0.10/bl to Singapore spot 10ppm sulphur gasoil assessments in 2018, with BP and trading firm Vitol among the buyers.

GS Caltex sealed its 2018 term 500ppm sulphur gasoil contracts at a discount of around $0.60/bl to Singapore spot 10ppm sulphur gasoil assessments, with buyers including Chevron and trading firm BB Energy. Details of the 2018 term deals signed by fellow South Korean refiners SK Energy and S-Oil are undisclosed, but they were possibly close to levels achieved by Hyundai and GS Caltex.

For 2017 term deals, at least one South Korean refiner agreed sales of 500ppm sulphur gasoil at a $0.30/bl discount to Singapore spot 500ppm sulphur gasoil assessments. The same refiner also sealed its 10ppm sulphur grade sales at a $0.40/bl premium to Singapore spot 500ppm sulphur gasoil assessments.

Demand picks up

A number of factors are behind the signs of a strengthening market. Global economic output is likely to rise by 3.6pc in 2017 and then pick up to 3.7pc in 2018, according to the IMF. Stronger industrial activity tends to boost the use of gasoil.

China's consumption of 10ppm sulphur gasoil is expected to rise after the government brought forward moves to ban the use of gasoil with sulphur levels higher than 10ppm. It implemented the ban from 1 November in some areas, earlier than its original deadline of 1 January 2018, because of concerns over winter air pollution.

Chinese oil consumption has accelerated in 2017, increasing by over 7pc and accounting for nearly half of the rise in global demand growth, boosted by a recovery in industrial activity.

Supply on the rise

But even if gasoil demand increases next year, it is unclear whether the growth will be strong enough to absorb rising supplies in Asia-Pacific. Chinese refining capacity is expected to rise by a net 230,000 b/d in 2017. And India has exported more gasoil during the second half of 2017, after a wave of refinery upgrades in the country led to higher production and a halt to imports of ultra-low sulphur diesel (ULSD) — with some refiners such as state-controlled IOC even starting to export the ULSD grade. The upgrades were triggered by Delhi's April introduction of the 50ppm sulphur Bharat Stage 4 (BS-4) transport fuel specifications, the domestic equivalent of the Euro 4 vehicle emissions standards.

Questions also remain over India's gasoil consumption growth next year, because of the lingering impact of the government's demonetisation policies and the imposition of a country-wide goods and services tax (GST) in July.

New refining capacity planned elsewhere in the region will also increase overall supplies and reduce outlets for exporters. Vietnam, which is a net importer of gasoil, may significantly reduce or even stop all imports of gasoil after its second refinery, the 200,000 b/d Nghi Son plant, comes on line in 2018.

The market remains divided over gasoil's prospects in 2018. And with a heavy maintenance schedule in the Asia-Pacific during the first quarter, a clearer picture may only emerge after from the second quarter onwards.

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