October 31, 2018 / 8:21 AM / 16 days ago

Black gold, white knuckles: Oil refiners face rollercoaster ride as fuel margins seesaw

SINGAPORE (Reuters) - Oil product margins have been tossed around on a wild rollercoaster ride in October, as factors like impending Iran sanctions, the China-U.S. trade war and upcoming shipping regulations yank fuel profits up, down and back again.

FILE PHOTO: Storm clouds gather over Shell's Pulau Bukom oil refinery in Singapore January 30, 2016. REUTERS/Edgar Su/File Photo/File Photo

Some profit margins, known as crack spreads in the industry, including for Asian fuel oil and gasoil have boomed, while others, such as Asian and European gasoline cracks, have plunged.

Crack spreads are the difference between the price of crude oil and the price of the products such as diesel and gasoline refined from it. The term is derived from the cracking process sometimes used in petroleum refining to produce the fuels.

Asia’s cracks for gasoil and fuel oil have gained 16.3 percent and a whopping 124.3 percent, respectively, since the start of the year - with most of the jump happening this month.

“These cracks are extraordinary,” said Sukrit Vijayakar, director of Indian energy consultancy Trifecta.

Vijayakar, a veteran of India’s refining industry, said such high gasoil and fuel oil cracks should move a refiner to maximize these products.

“Keenly aware that these cracks are extraordinary, he (the refiner) should protect such production decisions by hedging the cracks ... as an insurance to protect windfall gains,” Vijayakar said.

The margin on fuel oil - a residue from crude processing - is typically negative.

In the last week of October, however, it stood at around $1 per barrel, pushed up in part by tightening supply ahead of sanctions against Iran, a major supplier of fuel oil, which the United States will impose from next week.

Another strong performer has been distillate fuel, including gasoil.

One of the biggest drivers here has been new regulation by the International Maritime Organization (IMO). This will force shippers to adopt cleaner fuel standards from 2020, and it pushing up demand for low-sulfur gasoil made from heavy crude.

“In an IMO 2020 world, we expect distillate margins will increase,” Goldman Sachs said on Wednesday in a note to clients. “We expect refiners with...access to heavy crude barrels and high-distillate yields to benefit most from the regulations.”

GRAPHIC: Asian & European refinery margins - tmsnrt.rs/2P3eG3V

LOSER: GASOLINE

Not all has been rosy in refining. This year has been particularly painful for refiners specialized in churning out gasoline.

Booming auto sales in emerging markets and especially China, which sells more than 2 million new cars every month, but also healthy demand from the United States, have in the past made gasoline a favorite among refiners, many of whom maximized its yield.

That boom has turned into a bust as refiners now pump more than even this growing market can absorb, eroding profit margins.

“During September we had super gasoline cracks and super backwardation ... and then suddenly it hit a wall,” Vitol Group Chief Executive Russell Hardy said at the Reuters Global Commodities Summit.

“I think we were conscious that this was an issue for the market but it’s probably happened a little bit quicker than we were expecting,” he added.

European refiners sent their excess fuel to Asia, hoping to find a home there for their surplus petrol.

This came just as China’s massive refinery sector started exporting excess gasoline as even its thirsty domestic market couldn’t cope with the flood of fuel.

“There was nothing that was pointing to a strong gasoline market this autumn,” Gunvor Chief Executive Torbjorn Tornqvist told the Reuters Global Commodities Summit.

GRAPHIC: China crude processing vs fuel output & exports - tmsnrt.rs/2phRfVg

He added that the weakness reflected an abundance of lighter crudes in the market, which tend to yield more gasoline. “It is not only gasoline, it is also naphtha and propane – all these light fractions are in a bit of a surplus.”

Much of the light crude hitting the global market comes as production and exports in the United States have surged to records this year.

U.S. gasoline margins have tanked as inventories this month hit the highest on record seasonally. Margins sank to as low as $7.73 a barrel on Oct. 26, the weakest since 2010 for this time of year.

Refiners in the United States have an incentive to run full tilt this year due to strong distillate margins, which hit as high as $29.40 a barrel on Wednesday, the highest seasonally since 2012.

“In the refiners’ quest to make a lot of diesel fuel - as much as they can - it overproduced gasoline as a byproduct,” said Phil Flynn, analyst at Price Futures Group in Chicago.

Things may get worse, analysts said, especially if an economic slowdown on the back of widespread emerging market currency weakness and the Sino-American trade war sucks demand out from under a sector already swamped by glut.

“Gasoline fundamentals continue to deteriorate and are a source of concern for us,” Goldman Sachs said on Wednesday.

Additional reporting by Stephanie Kelly in New York and Ahmad Ghaddar and Shadia Nasralla in London; Editing by Kenneth Maxwell, Dale Hudson and David Gregorio

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