Asia eyes diesel outflows;China demand lags

Published on Jan 24, 2006 07:49 PM IST

Asia's diesel market will look toward South America and Europe to absorb a growing surplus this year as Indian exports grow.

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None | ByReuters, Singapore

Asia's diesel market will look toward South America and Europe to absorb a growing surplus this year as Indian exports grow, while higher retail prices cut regional consumer demand and China limits imports.

An increasing US reliance on imported distillates will force South America, which consumes a spectrum of diesel grades and used to import from the US Gulf Coast, to seek Asian diesel on a more regular basis.

That flow should help mop up supplies in the region as expectations for even higher international prices translate into limited diesel imports into developing countries such as Indonesia and Vietnam, now the top diesel buyers in Asia.

"Arbitrage flows to the West will play an important role, as they enable excess supplies to move out of the region so as to balance up supply and demand," said veteran trader Loh Fan Yip from Koch Refining International.

Southeast Asian governments have been scaling back fuel subsidies as they face budgetary pressure from high import costs, pushing retail prices up and cutting demand from industrial and agricultural users of the fuel.

The dismal state of regional demand suggests gas oil may not repeat the record $22-a-barrel crack spread seen in September last year, when surging global diesel demand for transport and power was one of the drivers of oil's price rally.

The current crack, or gas oil's value against Middle East Dubai crude , hovered just above $10.00 a barrel, off from $12.00 a barrel a year ago.

Asia is also long in supply as India, which imported diesel ravenously last year to meet cleaner fuel specifications, is joining the exporter fraternity.

Their entrance has replaced some of the cuts by Middle East refiners -- regular suppliers of oil products to Asia -- which are racing to meet growing domestic demand and prefer to ship cargoes to Bangladesh and Pakistan on higher netback profits.

"There is no doubt Asian refining capacity is far more than demand, which will pick up in tandem with the economy but the growth will not be explosive enough to absorb the supplies," Loh added.

Asia will have to rely on Western outlets to load off excess supplies like it did last year during the September-December period, when it shipped around 750,000 tonnes to Europe and South America in the aftermath of hurricane damage in the US.


Counting on Chinese growth to spur the Asian diesel market appears to be on the back burner for most players, if Chinese fuel prices continue to lag global levels.

"2006 may not turn out to be a strong market for regional exporters trying to target China so long as the prices remain disconnected," said analyst Victor Shum from Purvin & Gertz.

Echoing a similar sentiment, Frederic Lasserre, head of Commodities Research in Societe Generale, said: "China should have been a major importer of diesel but because of the domestic pricing mechanism (the cap on retail prices), China turned back as a net exporter."

China will limit imports of diesel -- largely used in the agriculture, fishing, power generation and construction sectors -- and will persist in ramping up domestic refining rates to make up the shortfall.

The world's number-two energy consumer already raised its crude imports in 2005 by 3.3 per cent to 2.6 million barrels per day (bpd), preliminary customs data showed.

"A lot will depend on the pricing reforms. Chinese demand growth will jump-start to a more healthy level if there are more economic incentives for refiners to import oil," said CLSA analyst Gordon Kwan in Hong Kong.

Beijing may soon launch a scheme of setting its domestic pump rates by linking them to global crude instead of oil products markets.

Even then, new refinery capacity may curb imports.

PetroChina is adding new capacity of a combined 130,000 bpd this year to three of its small plants, while rival Sinopec is hastening its refinery upgrades, bringing onstream a new 160,000-bpd crude unit in its Guangzhou plant and a maiden 160,000-bpd refinery in Hainan.

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