COLUMN-Bullish paper crude contrasts with soft physical Asia demand: Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

* GRAPHIC - Asia's crude imports vs. Brent price:

LAUNCESTON, Australia, June 3 (Reuters) - Crude oil futures have climbed to an 18-month high, but the physical market in the top-consuming region of Asia is lagging the gains amid ongoing soft demand and contracting refinery profit margins.

Brent crude futures reached an intraday peak of $71.48 a barrel on Wednesday, the highest since January 2020, before ending at $71.35, while the U.S. benchmark West Texas Intermediate reached $69.00 during the session, its highest since October 2018.

The rally in the two biggest crude futures contracts came amid optimism of a rebound in demand, especially in North America and Europe, as well as the decision by the OPEC+ producer group to stick with their plan to gradually ease production curbs through July.

But the optimism on display by investors in paper crude isn’t exactly being reflected in Asia, where physical demand appears lacklustre and pricing for cargoes appears to reflect the region’s ongoing struggles to contain the coronavirus pandemic.

Asia’s crude imports in May were provisionally assessed by Refinitiv Oil Research at just 23.07 million barrels per day (bpd), down from 24.54 million bpd in April, 24.79 million bpd in March and February’s 25.2 million bpd.

While China, the world’s largest crude importer, is likely to have eked out a small gain in May from April, the rest of the region’s top importers all showed softer outcomes.

China is estimated to have imported 10.03 million bpd in May, up slightly from the official customs outcome of 9.86 million bpd in April, but below March’s 11.69 million bpd.

Refinery maintenance is likely behind some of the restraint in China’s imports, but there is also the possibility that refiners are choosing to limit purchases given softer demand for exports of refined fuels and ample stockpiles.

India’s imports were estimated by Refinitiv at 3.90 million bpd in May, down from 4.46 million bpd in April.

The weakness in May comes ahead of the impact from the current coronavirus wave sweeping across the world’s second-most populous country, which has seen fuel demand plummet.

Gasoline sales plunged by 19% in May from April, while diesel consumption dropped by 19.9%, according to data compiled by state refiners.

It’s likely that fuel sales will struggle to show much improvement in June, although if early signs that the coronavirus is being contained continue, it’s likely India’s demand will return by July.

But the impact on crude imports will be felt with a lag, in other words, the next couple of months may be weak and a recovery likely only from August onwards.

Japan, usually Asia’s third-biggest crude importer but now under threat of losing that position to South Korea, saw inbound shipments of 2.19 million bpd in May, down from April’s 2.65 million bpd.

South Korea’s imports were 2.45 million bpd in May, down from April’s 2.73 million bpd, while the refining hub of Singapore also recorded lower imports in May from April.


Lower imports across Asia were accompanied by a drop in refinery profit margins, which have slipped to levels seen last year during the economic lockdowns imposed to combat the spread of the coronavirus.

A typical Singapore refinery processing Dubai crude is currently getting a gross margin of about $1.31 a barrel, down from an average of $2.10 in May and $2.67 in April.

By comparison, a U.S. Gulf coast refinery processing WTI is enjoying a margin of $11.11 a barrel, while a unit in Rotterdam using Brent is receiving $3.50 a barrel.

The softness in Asia's crude demand and refinery margins is showing up in the differentials between prices, with the Brent-Dubai exchange for swaps DUB-EFS-1M, which measures the premium of Brent crude over Dubai, rising to $3.28 a barrel on Wednesday.

This is up from a low so far this year of 72 cents a barrel on Jan. 5 and a total reversal of the situation that prevailed in March and April last year, when strong Chinese demand for crude saw Dubai trade as much as $6.43 above Brent.

Another measure to look at the difference between the paper market and the physical is to compare the front-month Brent contract with the three-month Dubai swap.

The front-month Brent contract shows the immediate sentiment in the investor market, while the three-month swap shows what is happening in demand for physical cargoes, which are arranged several weeks before delivery.

Brent futures ended at $71.35 a barrel on Wednesday, a premium of $3.93 a barrel to the three-month Dubai swap.

This spread has blown out from just $1.01 a barrel at the end of last year and $2.91 at the end of April.

Overall, the current optimism in the crude paper market is almost entirely based around the recovery underway in North America and Europe, home to the majority of traders and investors in the market.

The question is whether ongoing weakness in actual physical demand in Asia will eventually filter through to the paper oil market.