Asian gasoil price falls below gasoline

Asian gasoil prices have fallen below gasoline for the first time in two years because of rising gasoil supplies and strengthening gasoline demand as regional driving activity picks up.

The Argus Singapore 10ppm (0.001pc) gasoil price against Argus Singapore 92R gasoline fell to a discount for the first time in early September at -$0.20/bl and continued down to a low of -$1.75/bl. The last time gasoil traded below gasoline prices was on 13 November 2017 at -$0.25/bl.

Gasoil is the only transportation fuel that managed to maintain positive margins during the peak of the Covid-19 crisis. Demand from the industrial sector and road freight has been more resilient during the peak of lockdown compared with gasoline and jet fuel that depends heavily on human mobility. But prices are starting to weaken with the onslaught of supplies against subdued regional demand.

Gasoil refining margins, or the Argus Singapore 10ppm gasoil price to Dubai crude swaps, were assessed at an average of $7.18/bl during April, during the record demand crunch, after governments initiated Covid-19 lockdowns that limited demand for transportation fuels such as gasoline, jet fuel and gasoil. But 92R gasoline and jet fuel margins traded at -$7.01/bl and -$0.81/bl during the same period. Gasoil has also been more resilient compared with other transportation fuels with the increased gasoil demand for low-sulphur bunker fuel after the introduction of the International Maritime Organisation's 2020 regulations that capped sulphur content in marine fuels at 0.5pc.

Gasoline prices have benefited from increasing regional driving activity, the hurricane season in the US and a series of refinery issues affecting gasoline production units.

The fall in gasoil prices will start to put pressure on even complex refinery configurations. These refineries, equipped with hydrocracking and coking capacity, had an average gross margin around $5.10/bl in first-half 2020. Gross margins for refineries with residual fluid catalytic cracker capacity averaged $2.90/bl during January-June, supported by higher gasoil and gasoline yields, although still far below margins of more than $5/bl in 2019, according to Argus Consulting data. This was partly because their gasoil yield tends to be significantly higher than other configurations and their greater flexibility when it comes to crude selection.

Gasoil prices have become collateral damage with Asian refiners maximising gasoil against jet fuel yields this year with weaker aviation fuel demand. This was one of the first few steps towards optimising a refinery as refiners struggled to reduce their production of jet fuel, whose demand was obliterated by the pandemic.

Japan produced about 3.8 times more gasoil than jet fuel during January-August this year compared with about 2.66 times for the whole of 2019, according to Petroleum Association of Japan data. India produced about 10 times more gasoil than jet fuel during January-July against 6.79 times for the whole of last year, according to India's preliminary oil ministry data.

Additional supplies following refiners' switch in maximising gasoil yields since this year's second quarter pressured gasoil refining margins to a record low of $2.83/bl on 14 May.

Higher gasoil exports from India and China in the coming months are also expected to put further pressure on gasoil prices. Weaker domestic demand has turned Indonesia's state-owned refiner Pertamina, a typical net producer importer, into an exporter of middle distillate cargoes, weighing further on the gasoil market. A persistent overhang in European gasoil stocks has also limited arbitrage opportunities to bring gasoil cargoes from Asia-Pacific, keeping excess supplies largely within Asia-Pacific. The supply glut has also prompted suppliers seeking alternate outlets.

Driving activity, an indicator of gasoline demand, has increased around key gasoline-consuming countries, supporting gasoline prices, according to mobility data from US technology firm Apple that provide an indication of driving activity by tracking direction requests. Driving activity in Japan, Malaysia, Saudi Arabia, Taiwan, Thailand and Vietnam have all risen above the 13 January baseline in first-half September, while the largest Asia-Pacific gasoline importer Indonesia is only 5.29pc away from the 13 January baseline. Activity had fallen to 58.45pc below the baseline in April.

But a second wave of Covid-19 infections prompting renewed lockdowns, such as Jakarta in Indonesia, record high light distillates inventories in Singapore and higher Chinese exports will likely place a cap on gasoline prices.

By Aldric Chew and Lu Yawen