Winter kerosine demand unlikely to lift Asia refiners

The prospect of a colder winter in northeast Asia is likely to underpin heating demand for kerosine, but the fuel makes up too small a portion of the product mix to provide any significant support for refinery run rates.

La Nina conditions in the Pacific Ocean could send temperatures below average levels in Asia-Pacific this winter. Japan's meteorological agency says there is a 40pc chance of below-average temperatures for large parts of the country during the upcoming December-February winter.

This could increase demand for kerosine as a winter heating fuel. Kerosine use rose to 587,000 b/d during the most recent La Nina, in the December 2017 to February 2018 winter, or 17pc of Japan's total oil demand in the period. That was higher than during recent non-La Nina winters in 2018-19 and 2019-20, when kerosine accounted for 15.8pc and 14.8pc of total product demand respectively. Kerosine typically makes up around 9pc of demand for oil products — including gasoline, diesel, jet fuel, naphtha and fuel oil — over a calendar year.

But even a similar La Nina-driven increase may not do much to lift regional refining runs this winter. Kerosine is widely used for winter heating only in Japan, with other key refining countries in northeast Asia using either natural gas — in the case of South Korea — or coal, in China.

And refinery jet-kerosine yields are typically relatively low. Japan's jet fuel and kerosine production averaged 508,000 b/d in 2019, just 17.6pc of the country's total 2.88mn b/d of oil products output, according to PAJ data. Gasoil and gasoline production made up 25pc and 29.5pc of total output in the period, at 725,000 b/d and 850,000 b/d respectively.

Refiners are also likely to be reluctant to increase rates close to nameplate capacity because margins remain weak. Asia-Pacific gasoil refining margins hit record lows of $2.08/bl on 24 September, and while margins have recovered since then — to $3.92/bl yesterday — they are still far below the average of $13.14/bl in January, before Covid-19 took hold. The Asian gasoline market fell back into contango this week for the first time in about a month.

The impact of the coronavirus pandemic on global oil demand is likely to keep refinery utilisation rates under pressure in the short term. Japan's refinery run rates were just 63.5pc in the week to 10 October, according to the PAJ. South Korean refineries are running at about 70-80pc in October, according to market estimates.

By Sarah Giam