LAUNCESTON: The profit margin for making diesel in Asia is coming under sustained pressure from a glut of supplies as major exporters boost shipments and fewer cargoes head to Europe because of concerns over shipping via the Red Sea.
The crack spread, or profit margin, of making a barrel of gasoil, the building block for middle distillate fuels such as diesel and jet kerosene, at a typical Singapore refinery ended at $20.33 a barrel on March 15.
This was down from the previous close of $20.87 a barrel and just above the eight-month low of $19.89, reached on March 13.
The margin is down 28% from the high so far in 2024 of $28.26 a barrel, hit on Feb. 13.
The weakness comes as several indicators are flashing warning signs for diesel in Asia.
Stockpiles of middle distillates in Singapore, the regional trading hub for refined fuels, surged 8% last week to reach the highest since September 2021 as net exports of diesel dropped by 98%, and those of jet fuel by 26%, according to official data released on March 14.
Total middle distillate inventories in Singapore were 10.97 million barrels last week, up from 9.99 million the prior week, with stockpiles being boosted by an increase in arrivals from South Korea and China.
Despite the weakening crack spread for gasoil, refineries in Asia still have some incentive to export cargoes as a profit margin of around $20 a barrel is still above the 2023 lows of about $11.
But the likelihood of the crack spread dropping to match last year’s lows are increasing, especially as more diesel heads into Asia and less towards destinations west of the Suez Canal.
The attacks on shipping using the Red Sea to transit the Suez Canal by Yemen’s Iran-aligned Houthi group have led some shippers to divert cargoes to go around the Cape of Good Hope, a longer and costlier voyage.
Global transport of goods: Red Sea crisis causing severe disruptions
This has cut the volumes of refined fuels heading to Europe from Asia, a situation compounded by declining European demand as the northern winter ends.
Window shut lseg
Oil Research said in its latest report on Asia’s distillate market that the East-West arbitrage window is “firmly shut” with flows at three-year lows.
Just 140,000 metric tons of middle distillates went from East Asia to the West in February, and so far for March just 75,000 tons have been assessed, LSEG said.
India is also usually a major shipper of diesel to Europe, but shipments in the first quarter are likely to average 535,000 tons a month, which LSEG said will be the lowest first-quarter average since 2020, when the COVID-19 pandemic first hit.
India is instead sending more cargoes to Asia, with flows to the region exceeding 700,000 tons for both January and February, the most since August.
Add in rising exports from China and the result is higher inventories in the Singapore hub.
Exports from Singapore to major regional importers such as Indonesia and Australia are also weakening, placing further downward pressure on margins.
Total middle distillate shipments to Asian buyers dropped to 5.07 million tons in February, down from 5.94 million in January, and LSEG vessel-tracking and port data point to a further decline in March.
The factor that may limit the decline in the middle distillate profit margin is the upcoming refining maintenance season in Asia, which will see several units taken offline, mainly in the second quarter.
This may limit exports in the region, but questions remain over whether enough supply will be curtailed to offset lower shipments to Europe from Asian refiners.
The opinions expressed here are those of the author, a columnist for Reuters.
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