After the Russian-Ukrainian conflict caused the refining profit margin to soar for a while, Asian refineries seem to have begun to consider reducing operating rates.
Zhitong Finance APP learned that according to relevant company managers, as profit margins of oil refining (converting crude oil into fuels such as gasoline) declined this month, at least three refiners in North Asia are considering reducing the total operating rate as early as September. One of the companies is Formosa Petrochemical Corp., which says it has cut gasoline production and may in turn reduce overall operating rates.
In fact, as major economies have not yet fully escaped from the impact of the epidemic lockdown, the market has now expected that refinery production capacity may decline in the last quarter of this year, which may pose another resistance to crude oil prices. Benchmark Brent crude futures are expected to see its first two-month decline since the end of 2020, amid concerns about the recession and the shock to commodities including energy.
Although the spot premium of Asian crude oil has climbed this month, indicating that demand is still strong at present, profit margins for products such as gasoline have fallen back to pre-Russia conflict as tensions ease. This also squeezes profits for refiners and may indicate a slowdown in operations.
"If the market does not improve, the company may experience a sharp slowdown from September," said Lin Keh-Yen, spokesman for Formosa Petrochemical. "But the refining work in August is unlikely to undergo significant changes as diesel and low-sulfur fuel oil margins remain good. In addition, product sales and crude oil procurement have been completed this month."
Lin also said Formosa Petrochemical had cut gasoline production by about 5% last week and may consider further reducing gasoline production based on market conditions. It is understood that in Asia, oil traders will start booking crude oil shipped in October next month after the September shipment cycle ends this week.
Industry consulting firm FGE also warned in a report on July 22 that the weakness of gasoline will inevitably affect other products, and the overall profit of the refinery will further decline.
And, not only in Asia, but also in other regions, gasoline prices have also shown signs of weakness. For example, during the summer driving season in the United States, gasoline prices soared to record highs, while high oil prices weakened gasoline usage. According to the latest data from the U.S. Energy Information Administration (EIA), gasoline demand is only slightly higher than the same period two years ago, but lower than other years since 2000.
In addition to gasoline, Asia's diesel cracking profits are also under pressure. According to Bloomberg’s fair value data, diesel cracking profit in Asia has fallen by 40% from its recent high at the end of June, but is still more than double the pre-epidemic level in July 2019. It is reported that diesel accounts for the majority of Asian refineries' exports.
