China Prompts Oil Price Crash

The marked shift in oil sentiment recently has been to a great deal prompted by a widespread concern of Chinese demand peaking this or next year as LNG displaces diesel in long-haul trucking, EV sales overtaking conventional cars since July and rail expansion eating into jet fuel recovery.

Chinese refinery runs have been declining for five straight months, with the National Bureau of Statistics reporting throughput rates at 13.91 million b/d in August amidst a widespread decline in Shandong teapot runs, as low as 55% last month. 

Meanwhile, Asian refiners’ margins slumped to the lowest seasonal levels since 2020 as high inventories of diesel and gasoline become an increasingly worrying factor as peak summer demand tapers off.

China’s clampdown on tax evasion is aggravating the pressure on refiners after a Shandong court ruled two refiners run by state-owned firm Sinochem, the Huaxing and Zhenghe plants totalling 220,000 b/d in capacity, fully bankrupt. 

Indian export of refined fuels on the decline

Use of crude oil vessels to ship refined fuels such as diesel to key European markets by Indian refiners has declined in May after volumes neared two-year high levels last month.

That is because of rising inventories in the Antwerp-Rotterdam-Amsterdam region and shaky east-west diesel price spreads undermining the case for sellers to ship large volumes of the industrial fuel to West.

While higher April shipments from India to Europe provided a floor for Asian margins, fewer such voyages in May will likely compel Indian refiners to shift diesel sales back to Asia, exacerbating a supply glut in the region, analysts and traders said.

Diesel exports using Suezmax and Aframax vessels Mesta, Pertamina Halmahera and Marlin Santorini - mostly from Reliance Industries' Jamnagar refinery - reached a near two-year high of around 380,000 metric tons (2.831 million barrels) in April, Kpler, Vortexa and LSEG shiptracking data showed.

Shiptracker Kpler in February estimated a switch by 35 Aframax crude tankers to carry refined products instead of crude.

Traders switched to using Suezmax and Aframax tankers - that typically load so-called "dirty" crude oil and residue fuel - for carrying "clean" refined products after freight rates for long-range (LR) tankers spiked following Houthi attacks on ships in the Red Sea that forced longer voyages and tightened vessel availability.

"At the time it was a reflection of how tight the LR1 and LR2 clean product tanker market was given the additional tonne miles vessels were having to do to avoid the Red Sea, and the lack of available prompt tonnage to book because ships were massively displaced given the additional sail times," said Wood Mackenzie's research analyst Emma Howsham.

The crude oil market was also weaker, as refinery maintenance in the United States and Middle East dented demand for dirty vessels, making it attractive to ship diesel using them, she added.

The cost for shipping 65,000 tons of fuel on a LR1 tanker averaged US$75 per ton in March and April from India to northwest Europe as compared to US$60 a ton in February, pricing data from SSY Tanker showed.

Even after the cost for scrubbing and cleaning a vessel to load ultra-low sulphur diesel, that was still nearly twice the cost for shipping up to 130,000 tons of fuel on a Suezmax vessel on a similar route, traders said.

Traders have been among the biggest shippers of Indian-origin diesel, and they have the option for several discharge destinations and thus have room to ship using bigger vessels, one Europe-based trade source said.

The trend has abated for May with no dirty tankers carrying diesel on the India-northwest Europe route, shiptracking data showed, as analysts expect Europe's supply to be long.

The economics for Indian refiners to supply to Europe via the Cape of Good Hope looks challenging as "European supply looks ample in the coming months", said Woodmac's Howsham.

 

Pakistan: Need for Revamping Oil Refineries

Lately, I got an opportunity to participate in a discussion with some young and enthusiastic Chartered Accountants discussing the outlook for crude oil refineries in Pakistan.

They were of the consensus that since local refineries have become obsolete and capable of producing a few products only, it would be prudent to shut these and import the finished products.

Almost all of them were annoyed by production of furnace oil containing high sulfur, especially because now the Government of Pakistan (GoP) has virtually stopped power generation at plants using furnace oil.  

However, they had no clue what to do with the existing facilities, paying off banks, finding employment opportunities for those to be laid off and mobilizing foreign exchange for the import of finished products.

One of the youngsters who was bold and outspoken said, “Our mandate was to study the outlook and not to give suggestions regarding revival of these obsolete refineries”.

The other gentleman said, “Pakistan has to produce environment friendly products and if the local facilities are incapable of producing these products, the country must shutdown inefficient and pollution spreading refineries”.

One of the gentleman hit head of the nail by saying, “The real problem for the poor operating capacity and higher cost of production is production of ‘High Sulfur Furnace Oil’. As the storage tanks are full refineries have no option but to suspend refining activity”.

I presented to them my rationale, which I am sharing with policy planners, activists, to make the existing refineries eco-friendly. My submissions are:

The successive governments have failed in upgrading these refineries, but these are still producing, though fewer products, to meet the indigenous demand. Therefore, efforts should be made to operate these refineries at optimum capacity utilization and export surplus furnace oil. However, there is an urgent need to come up with a prudent “Refinery Policy” to facilitate creation of new refineries based of modern technology.

Along with this, incentives should be provided to ensure up gradation of the existing refineries.

There is no need to shutdown/scrap the existing facilities, which are capable of meeting the existing demand of the large percentage of the existing demand.

To put it on record the aggregate capacity of the exiting refineries, is estimated around 22 million tons, which is sufficient to meet almost 100% of the indigenous demand.

At the best, additional units have to be installed at the refineries to bring down the sulfur content in furnace oil for using it for power generation.

It is also to bring on record that almost all the power plants are have ‘dual fired’ boilers and these is no need to run these plants on gas, particularly on R-LNG.

I invite all by readers to please share their point of view.