Diesel is subsidizing other fuels in Asia, but beware China
(Reuters) - The profit for turning a barrel of crude oil into refined fuels in Asia has slipped to the lowest in three months, even though the margin on diesel remains elevated.
The profit, or crack, on making products at a typical Singapore refinery from Dubai crude <DUB-SIN-REF> fell to $4.07 a barrel on Monday, the lowest since July 10 and down 74% from the recent high of $15.40 on Aug. 28.
The decline has been driven by weakness in producing fuels such as gasoline and naphtha, even as the margin on middle distillates has performed strongly.
The trend for refining in Asia is increasingly characterized by strong margins for middle distillates, which are enough to offset weakness in gasoline and even losses for naphtha.
This is being driven by a variety of factors, most of which are beyond the control of the refiners.
These include output cuts by the OPEC+ group of exporters, and especially the extra 1 million barrels per day reduction by the group's de facto leader, Saudi Arabia.
These cuts have removed mainly medium sour crudes from the global market, cutting the availability of grades that are sought by many refiners for their high yield of gasoil, the building block for middle distillates such as diesel and jet kerosene.
The loss of some Russian exports of diesel have tightened markets for the fuel largely used for heavy vehicle transport, industry and agriculture.
There is also some question over the volume of diesel being exported in Asia, with strength in some countries being offset by weakness in others.
Asia's total exports were 7.4 million metric tons in September, equivalent to about 1.85 million bpd, according to data from LSEG.
This was down slightly from 1.86 million bpd in August and well below the peak month this year of February, which saw shipments of 2.52 million bpd.
There is an increasing market expectation, or perhaps hope, that China will ride to the rescue of Asia's diesel markets in the fourth quarter of this year, much as it did last year when its vast refining sector boosted shipments to capture strong margins.
Certainly, the conditions are in place insofar as Beijing has granted additional fuel export permits, diesel profits remain high and Chinese refiners have been building stockpiles of discounted Russian and Iranian crude, meaning they can boost exports of products without having to import more oil.
However, actual evidence of a surge in China's diesel exports is still lacking, with the LSEG estimating October shipments will be in the region of 1.2 million to 1.3 million metric tons, roughly in line with the 1.14 million in September and the 1.26 million in August.
Data from commodity analysts Kpler is also far from convincing, with just 660,000 metric tons of diesel shipments from China so far in October.
While this figure is likely to be revised higher as more cargoes are assessed, it's also likely that the final figure will be around the September outcome.
It's possible that China's diesel exports will accelerate from November onwards, but they would have to increase substantially to match official customs figures from the same period last year, when November diesel shipments were 2.1 million metric tons, rising to 2.79 million in December.
MARGINS DIVERSIFY
In the meantime, the profit margin for middle distillates keeps rising, with the crack for 10-ppm sulfur gasoil in Singapore ending at $28.72 a barrel on Monday, a two-week high and more than double the low this year of $11.58 from April 28.
In contrast, the profit on producing gasoline from Brent crude in Singapore <GL92-SIN-CRK> dropped to $3.65 a barrel on Monday, not much above the low this year of $2.91 on Sept. 29, and 82.4% below the peak of $20.71 from Aug. 23.
The situation for naphtha <NAF-SIN-CRK> is even worse, with the loss of making a metric ton of the petrochemical feedstock widening to $12.98 on Monday from a loss of $3.17 on Oct. 13, and also a rapid deterioration from the recent peak of a profit of $43.18 on Aug. 24.
Effectively, Asia's refiners are happy to suffer weak margins on fuels such as gasoline and naphtha because the profits on middle distillates are so high.
If China's exports of diesel and jet kerosene do surge toward the end of the year, that may lower the profits for middle distillates, which may be enough to send the overall refining margin into negative territory.
The opinions expressed here are those of the author Clyde Russell, a columnist for Reuters.
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