LAUNCESTON, Australia, Dec 3 (Reuters) - —Clyde Russell is a Reuters columnist. The views expressed are his own.—
The sharp fall in crude prices since June should be like manna from heaven for Asia’s oil refiners, but while margins have recovered, they aren’t dramatically higher.
Global benchmark Brent crude has dropped 39 percent since its 2014 high of $115.71 a barrel on June 19 to the $71.09 close on Tuesday.
The profit margin for a barrel of crude processed at a refinery in Singapore using Dubai crude was $7.28 a barrel on Tuesday, according to Reuters data <REF/MARGIN1>.
While this is up from the $3.66 a barrel average in August, which was the lowest margin this year, it’s still below the $7.41 average in November.
Turning to individual products, and the profit, or crack, on producing a barrel of gasoil from Dubai crude in Singapore has risen 23 percent since the low this year of $12.99 a barrel on June 30 to Tuesday’s $15.95.
This means that the gain in profit for gasoil, which can be made into diesel and jet fuel, has been only slighter better than half the fall in the price of oil.
In 2012, when Brent fell 29 percent between March 16 and June 21, the gasoil crack rose 48.2 percent between May 30 and Aug. 28.
Last year, when Brent dropped 17.8 percent between Feb. 13 and April 17, the gasoil crack responded by gaining 42 percent between April 30 and July 22.
In other words, in the previous two years, smaller percentage drops in oil prices have resulted in a larger gain in gasoil cracks than this year.
Gasoline cracks in Asia have fared better this year in percentage terms, rising 130 percent from the June low of $3.27 a barrel to Tuesday’s close of $7.53, but it should be borne in mind that the actual dollar profits from making gasoline are considerably smaller than those for gasoil.
Overall, the picture that emerges is one of improving refinery margins, but not perhaps the strong recovery that could have been expected with such a dramatic slump in the price of oil.
Why is this the case? While oil and refining markets are affected by a variety of factors, the main reason may be the supply situation.
Much of the weakness in oil prices has been ascribed to a glut of crude supply, especially rising output from shale in the United States.
At the same time, major producers such as Saudi Arabia appear to be willing to accept lower prices as they are unwilling to cut output and risk losing market share.
In the Asian refining sector, margins have been kept lower than might have been expected by rising capacity, both within the region and in nearby competing areas such as the Middle East, and by muted demand growth for fuels.
Refiners have been unable to pocket more of the gain from lower crude prices because of competition from new refineries, such as the 400,000 barrel per day (bpd) Yanbu plant operated by Saudi Aramco and China’s Sinopec.
Increased capacity in China has also resulted in higher exports of products, with shipments of what China’s customs calls light diesel rising 54.5 percent in the first 10 months of 2014 over the same period last year.
India’s refineries are also processing more crude even as the domestic market slows, with fuel sales falling 1 percent in October.
Japan’s oil product sales fell 2.5 percent in October from a year earlier to just over 3 million bpd, the lowest for the month since 1985.
It appears that for now the surplus refining capacity is preventing Asia’s refiners from rebuilding margins on the back of weaker crude prices.
While there may well be a seasonal boost to margins from the northern winter, refinery profits are likely to remain under pressure as long as the market remains oversupplied with fuels.
Editing by Alan Raybould