LAUNCESTON, (Australia): Refining margins in Asia have collapsed in recent weeks, leaving refiners on the precipice of making losses on every barrel of crude oil processed.

The question is how will refiners, crude oil producers and consumers respond to this rapid shift in market dynamics.

Refiners are likely to be tempted to cut processing rates in order to reduce the supply of refined products, thus boosting the price. Crude oil exporters, such as Saudi Arabia, may reverse recent hikes in their official selling prices (OSPs), which were largely believed by market watchers to be related to the now-vanishing high refinery margins.

Consumers are likely to only increase demand if retail prices retreat significantly, a process that generally takes some time as the more expensive fuel has to work its way through the supply chain first. The profit margin at a typical Singapore refinery processing Dubai crude dropped to just 83 cents a barrel on Monday, down 97.3% from the record high of $30.49 a barrel reached on June 21.

That peak was driven by several factors including strong demand for diesel and jet fuel as Asian economies recovered from the COVID-19 pandemic, the sharp decline in refined product exports from China, as well as those from Russia as Western buyers shunned cargoes after Moscow’s Feb. 24 invasion of Ukraine. But the surge to record refinery profits was largely a middle distillates story, with the Singapore margin for refining a barrel of gasoil, the building block for diesel and jet kerosene, reaching a record high of $71.69 a barrel on June 24.

It has since slipped to end at $38.54 a barrel on Monday, and while the decline looks precipitous, it’s worth noting that the margin was just $8 this time last year, and $6.69 in July 2020.

However, while the profit, or crack, for making gasoil remains relatively strong, the margins on gasoline and naphtha are considerably weaker.