June 26, 2018 / 5:09 AM / in 9 months

UPDATE 2-Asia oil refining margins drop to two-year low as gasoline profit plunges

* Record output, exports from China weigh on market

* Asia refiners buy more light crude to produce naphtha, gasoline (Adds details, comments)

By Jessica Jaganathan and Florence Tan

SINGAPORE, June 26 (Reuters) - Singapore refining margins, the benchmark for profitability among oil processors in Asia, fell to their lowest in two years, dragged down by lower gasoline margins as refiners have ramped up output after completing maintenance and as China stepped up exports.

Margins at a typical complex refinery in Singapore dropped to $4.28 a barrel at the market close on Monday, the lowest since August 2016, according to Thomson Reuters data. Among oil products, gasoline margins fell the most, dropping by half in the past month to under $5 a barrel. DUB-SIN-REFGL92-SIN-CRK

“The (refining) margin weakness was shared globally,” said Joe Willis, senior research analyst at Wood Mackenzie, adding that the consultancy’s global composite margin fell to $4.20 a barrel during the week of June 18, well below the five-year average of almost $6 a barrel.

“The weakness can be primarily attributed to weaker gasoline cracks. Higher outright crude oil prices are likely to result in slower demand growth, particularly in the U.S. among the peak demand season,” he said.

China, which holds the most refining capacity in Asia, increased crude throughput during the first five months of 2018 by 9 percent from a year ago to a record, with the bulk of the increase leading to a boost in output of aviation and motor fuel.

Similarly, refineries in Japan, South Korea and Singapore are also ramping up output after completing maintenance earlier in the second quarter.

Asia will also be importing a record 39 million barrels of U.S. crude in July, mainly light grades. That could further lift gasoline and naphtha output and continue to weigh on refiners’ profits, said two traders that participate in the market.

“Refineries in the region have been processing lighter crude as the margins for naphtha and gasoline have been quite good up until recently,” said a Singapore-based crude oil trader.

“So (the drop in margin) may mean a switch in crude or yield again, but it will take a while to take effect. The (refining) margins are getting very compressed now.”

Diesel and jet fuel margins in Asia have also slipped to their lowest since November as refineries increased output. Meanwhile, China stepped up diesel exports as domestic demand has fallen during an annual fishing ban that is scheduled to run until mid-July, three middle distillates traders said.

Chinese exporters are also focusing on selling diesel within Asia as the economics for exporting to Latin America are no longer profitable, they said.

India has also been stepping up exports of diesel in the spot market due to weaker demand in the domestic sector because of the monsoon season which typically reduces the need for diesel for irrigation pumps, two traders that participate in the market said.

Even with the drop in overall margins, Chinese domestic margins remain high enough to support refiners maintaining their current processing rates, said a manager from PetroChina Co’s Dalian refinery, adding the plant has no plans to cut runs.

Japanese domestic margins also remain firm enough to support runs, said an analyst at brokerage in the country who asked to remain unidentified. Idemitsu Kosan Co Ltd, the second-biggest Japanese refiner by sales, said on Tuesday it planned to raise crude throughput in the third quarter by 3 percent from a year ago.

Reporting by Jessica Jaganathan and Florence Tan; Additional reporting by Meng Meng in BEIJING, Osamu Tsukimori in TOKYO, Jane Chung in SEOUL and Henning Gloystein in SINGAPORE; Editing by Christian Schmollinger

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