Viewpoint: Asia gasoil, jet fuel supported by IMO 2020

Plans by the International Maritime Organisation (IMO) to cut sulphur content in marine fuels from 2020 are poised to affect Asia-Pacific middle distillates markets, as marine fuel users seek to blend gasoil with high-sulphur fuel oil to bring down sulphur content. This implies a reduction in middle distillate availability, directly hitting gasoil and jet fuel supply — and so prices and differentials — in the run-up to the implementation of the new requirements in January 2020.

Term gasoil and jet fuel deals in the Mideast Gulf and northeast Asia for 2019 have been agreed at higher levels, indicating a firmer market for the fuels. Middle distillate crack spreads are expected to rise significantly leading up to the IMO 2020 regulations, which will reduce maximum sulphur levels in marine fuels from the current 3.5pc to 0.5pc.

Term premiums strengthen

State-owned Middle East refiners Abu Dhabi's Adnoc, Bahrain's Bapco and Kuwait's KPC have all agreed 2019 term contracts for 10ppm sulphur gasoil and jet fuel at higher cash differentials compared to 2018.

Adnoc concluded its 2019 term gasoil contracts at a $1/bl premium to Mideast Gulf spot assessments and its jet fuel contracts at a premium of $1.30/bl. Bapco agreed deals at around $1/bl to Mideast Gulf spot assessments for gasoil and a premium of $1.15/bl for jet fuel, while KPC will sell term jet fuel at a premium of $1-1.05/bl.

Adnoc and Bapco agreed term 2018 premiums for 10ppm sulphur gasoil at premiums ranging from $0.50-0.70/bl to Mideast Gulf spot assessments. Bapco agreed to sell its standard specification ultra-low sulphur diesel (ULSD) at a $0.50/bl premium to Mideast Gulf spot assessments for 10ppm sulphur gasoil, slightly lower than Adnoc's term contract premiums at $0.60/bl. Bapco's cargoes that conform to UAE import specifications were agreed $0.20/bl higher at a premium of $0.70/bl.

Term jet fuel premiums for 2018 agreed by Adnoc, Bapco and KPC were in a $0.70-0.85/bl range.

Taiwan's private-sector refiner Formosa has also tied up term gasoil sales in 2019. Premiums for the 10ppm grade were concluded at $0.15-0.25/bl to Singapore spot assessments, while differentials for the 500ppm grade were done at a discount of $0.50/bl to Singapore spot assessments.

Formosa last year attracted the highest bid for its 500ppm sulphur gasoil supplies at a discount of around $0.65/bl to Singapore 10ppm sulphur gasoil spot assessments. The refiner's 2018 contract for 10ppm sulphur gasoil also got the highest bid, at a premium of slightly above $0.20/bl to Singapore 10ppm sulphur gasoil spot assessments.

The 500ppm grade likely fetched a higher price because of the impending IMO 2020 sulphur cap regulation for bunker fuels, given gasoil is one option as a blending component in the marine fuel pool.

Supply to increase

Regional supplies are on the rise, which may help to mitigate the squeeze on middle distillates availability from the IMO-driven increase in demand. Northeast Asian refiners are increasingly turning to the export market amid lower-than-expected domestic consumption. China in late November unexpectedly awarded more oil product export quotas, taking the total quota for 2018 to 48mn t, up by 11.6pc from 2017. The quotas include 386,000 b/d of gasoil and 334,000 b/d of jet fuel.

And South Korea is heading for its first annual fall in domestic diesel consumption in a decade, reflecting slowing economic growth and increased prices for the fuel. South Korean refiners are increasingly turning to exports as domestic demand for transportation fuels weakens. Diesel exports averaged nearly 512,000 b/d in January-October, up by 6.1pc from a year earlier. Demand will have to exceed 2017's finishing pace by nearly 38,000 b/d in November and December for South Korea to avert its first yearly fall in diesel demand since the 2008 global financial crisis.

New refining capacity planned elsewhere in the region will also increase overall supplies and reduce outlets for established exporters. Vietnam has halted almost all imports of gasoil after its second refinery, the 200,000 b/d Nghi Son plant, came on line in 2018. It exported its first kerosine cargo in October and is expected to export its first jet fuel cargo by December.

Refinery output is also on course to rise in Thailand. The Thai Oil downstream unit of state-controlled PTT has awarded a contract to upgrade and expand capacity at its 275,000 b/d Sri Racha refinery to 400,000 b/d by 2022. The upgrade will allow Thai Oil to produce cleaner, higher-value fuels through the upgrade, by reducing output of low-margin products, such as bunker fuel, and raising output of middle distillates.