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Oil traders eye India as China fades

Forget China in 2006. Sell crude to India, diesel to the United States and watch the growth of global shipping trade.

india Updated: Feb 03, 2006 18:10 IST

Forget China in 2006. Sell crude to India, diesel to the United States and watch the growth of global shipping trade if you want to capitalise on the trends that will shape the Asian spot oil market this year.

China, whose oil demand surge helped drive crude's two-year rally, was the watchword for almost all Asian traders in 2005, but a halt in diesel imports, weaker fuel oil demand and a lack of naphtha buying dashed many bullish expectations.

Crude imports by the world's number-two consumer are expected to rise by 6 or 8 per cent this year -- modest compared with the shocking 35 per cent surge of 2004 -- but an increase in domestic refining should sate the expected growth in consumer fuel demand, muting China's impact on regional flows.

While China's overall demand growth is still likely to add strain to world oil markets already unnerved by geopolitical developments, physical oil traders are more concerned with seeking new niches for product sales and profitable trades.

Arbitrage deals, exploiting the price differences between regions or markets, are likely to increasingly feature as Asian traders view growing US and European demand for transport fuels and constrained refinery expansion outside Asia.

"Arbitrage imports 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.

Asia's third-largest consumer India will also come into sharp focus as it embarks on an ambitious plan to turn itself into a refining export hub, with much of its added 400,000 barrels per day (bpd) of capacity aimed at intentional markets.

An estimated 6 per cent rise in runs at China's 16 major plants will require more imported crude, but most of the fuels produced are likely to be sold domestically as Beijing strives to minimise excess output.

Refinery expansions should be supportive for crude markets, with new capacity in Asia likely to be about double the 500,000 bpd of crude from new Asian and Russia-Pacific fields.


Sophisticated refiners in Singapore and Japan facing tepid domestic demand growth will eye gasoline and jet fuel shipments to the West Coast of top consumer the United States, where no new refineries have been built for 30 years.

"I see more fuel oil and more heavier crude heading to Singapore for processing and blending," said the head of a large independent trading house.

"Refineries in South Korea, Taiwan and China are increasingly capable of producing premium-quality light products that meet western specifications, hence more westbound shipments."

Stricter US government environmental standards that call for low-sulphur content may boost diesel prices this year, attracting cargoes of the fuel from across the Pacific.

India, where stricter regulations caused a diesel shortage a year ago, is likely to ramp up exports and eye growing economies in the Middle East and a diesel shortfall in Europe, where motorists are switching away from gasoline.

Gasoline and diesel demand from top Asian importer Indonesia is recovering slowly after the country nearly doubled prices last year, while demand from number-two importer Vietnam looks steady. But consumer demand in both countries could be dampened if they move prices further towards international market levels.

"Oil demand elsewhere in Asia has slowed somewhat relative to 2004, but is still growing," said Deutsche Bank. "Despite some evidence that demand growth has been impacted by higher prices, we believe this is temporarily moderating demand."

China is likely to remain a key exporter of gasoline, but booming car sales could spur consumption if state price caps remain. The government has pledged to raise prices to market levels, which could hit demand, but has set no timetable.


More demand for naphtha, a feedstock for an expanding Chinese petrochemical industry looking to supply the world with goods such as plastics and toys, could also shift refiners away from making the motor fuel.

"Market fundamentals for gasoline will weaken in 2006, but naphtha, gas oil and fuel oil will see fundamentals strengthening," said Bakhtiar Talhah of consultancy PFC Energy.

Indian monthly exports of light product naphtha have reached 450,000 tonnes, triple 2003 levels, which should help meet higher demand from new petrochemical plants starting up in 2006.

Heavy fuel oil demand will be led by shipping traffic, growing at over 5 percent annually, driven by higher East-West trade, though utility demand from China may be stalled by increased power supply and cheaper options such as gas.

"I think demand is still going to be pretty good this year, and the deficit of the Asia-Pacific zone is going to increase," said Frederic Lasserre, head of research at SG Commodities.

"The centre of gravity is still shifting to Asia."

First Published: Feb 03, 2006 13:24 IST