Oil Refiners Face Rollercoaster Ride as Fuel Margins Seesaw
Oil product margins have been tossed around on a wild rollercoaster ride in October, as factors like impending Iran sanctions, the China-U.S. trade war and upcoming shipping regulations yank fuel profits up, down and back again.
Some profit margins, known as crack spreads in the industry, including for Asian fuel oil and gasoil have boomed, while others, such as Asian and European gasoline cracks, have plunged.
Crack spreads are the difference between the price of crude oil and the price of the products such as diesel and gasoline refined from it. The term is derived from the cracking process sometimes used in petroleum refining to produce the fuels.
Asia's cracks for gasoil and fuel oil have gained 16.3 percent and a whopping 124.3 percent, respectively, since the start of the year - with most of the jump happening this month.
"These cracks are extraordinary," said Sukrit Vijayakar, director of Indian energy consultancy Trifecta.
Vijayakar, a veteran of India's refining industry, said such high gasoil and fuel oil cracks should move a refiner to maximize these products.
"Keenly aware that these cracks are extraordinary, he (the refiner) should protect such production decisions by hedging the cracks ... as an insurance to protect windfall gains," Vijayakar said.
The margin on fuel oil - a residue from crude processing - is typically negative.
In the last week of October, however, it stood at around $1 per barrel, pushed up in part by tightening supply ahead of sanctions against Iran, a major supplier of fuel oil, which the United States will impose from next week.
Another strong performer has been distillate fuel, including gasoil.
One of the biggest drivers here has been new regulation by the International Maritime Organization (IMO). This will force shippers to adopt cleaner fuel standards from 2020, and it pushing up demand for low-sulphur gasoil made from heavy crude.
"In an IMO 2020 world, we expect distillate margins will increase," Goldman Sachs said on Wednesday in a note to clients. "We expect refiners with...access to heavy crude barrels and high-distillate yields to benefit most from the regulations."
Not all has been rosy in refining. This year has been particularly painful for refiners specialized in churning out gasoline.
Booming auto sales in emerging markets and especially China , which sells more than 2 million new cars every month, but also healthy demand from the United States, have in the past made gasoline a favorite among refiners, many of whom maximized its yield.
That boom has turned into a bust as refiners now pump more than even this growing market can absorb, eroding profit margins.
"During September we had super gasoline cracks and super backwardation ... and then suddenly it hit a wall," Vitol Group Chief Executive Russell Hardy said at the Reuters Global Commodities Summit.
"I think we were conscious that this was an issue for the market but it's probably happened a little bit quicker than we were expecting," he added.
European refiners sent their excess fuel to Asia, hoping to find a home there for their surplus petrol.
This came just as China's massive refinery sector started exporting excess gasoline as even its thirsty domestic market couldn't cope with the flood of fuel.
"There was nothing that was pointing to a strong gasoline market this autumn," Gunvor Chief Executive Torbjorn Tornqvist told the Reuters Global Commodities Summit.
He added that the weakness reflected an abundance of lighter crudes in the market, which tend to yield more gasoline. "It is not only gasoline, it is also naphtha and propane – all these light fractions are in a bit of a surplus."
Analysts say things may get worse, especially if an economic slowdown on the back of widespread emerging market currency weakness and the Sino-American trade war sucks demand out from under a sector already swamped by glut.
"Gasoline fundamentals continue to deteriorate and are a source of concern for us," Goldman Sachs said on Wednesday.
(Additional reporting by Ahmad Ghaddar and Shadia Nasralla; Editing by Kenneth Maxwell and Dale Hudson)