Refining margins rebound as China’s starts to show some signs of recovery and oil prices rise amid plans for production cuts

Thailand’s inflation numbers that are set to be released today could see a slight dip for the past month but the outlook for the months ahead could be a little bleaker as the key component – oil has started to see an uptick.

Surging oil prices which have been blamed for the rise in inflation across the world, and oil prices were on a decline for the past few weeks but over the past few days oil prices on the rise once again as the Organization of the Petroleum Exporting Countries (OPEC) is set to meet later today to decide on whether it wants to cut the oil production by 1-2 million barrels/day.

Brent crude for January deliveries has bounced back to about US$ 90/barrel after having dipped to about US$ 80 around mid-September.

The rise in oil prices has prompted refineries to see a positive spin and Suppata Srisuk, sector analyst at Bualuang Securities says that the headline gross refining margin (GRM) has started to inch up.

“Headline GRM inched up last week, boosted by fatter crack spreads across all product categories,” Suppata said in a report this morning to clients.

She said that this is now the peak season for hurricanes, which might disrupt refinery operations in various parts of the world and, the autumn refinery maintenance season has started, factors that may tighten supply and thus boost GRM.

refining margins rebound as china’s starts to show some signs of recovery and oil prices rise amid plans for production cuts

Spread movement as of Oct 4, 2022

The positive side for consumers is that the global economic slowdown which could derail global demand recovery and lifting of China’s export quotas for refined petroleum products which would add more supply to the market are the key factors to watch as they may put downward pressure on GRM.

To help keep the crude prices low, there continues to be a fear that the rising interest rates to tame the inflationary pressure would likely dampen the economy and the demand for crude oil.

China’s Role

China, one of the world’s leading oil importing countries, has seen its official manufacturing purchasing managers’ index, a measure of economic trends in manufacturing, rise to 50.1 in September from 49.4 in August. A reading above 50 reflects expansion of activities while a number below shows a contraction.

Amid the slowing Chinese economy, the demand for China’s oil demand forecast for 2022 has been reduced by 200,000 barrels/day on the back of intermittent lockdowns and property market deterioration. OPEC+ is scheduled to meet with the possibility of output cut on the agenda.

The bloc last agreed to a 100,000 barrels/day cut for October. In August, OPEC+ production was estimated at around 3.37 million barrels/day below target production levels. So, in reality, any cut in supply will likely be smaller than whatever figure the group announces, a leading refiner in Thailand said in a note to its senior management.

China’s refiners are optimistic about the likelihood of economic recovery in Asia’s top consuming country in the Q4 2022 and into 2023 as pandemic control measures ease, helping to boost domestic oil product demand.

The optimism comes even as China faces near-term headwinds such as slow travel demand for the upcoming week-long National Day holiday, property debt issues, foreign companies shifting supply chains from the country, slowing goods exports and rising unemployment after a series of city-wide lockdowns over April-May.

China’s oil demand in Q4 is expected to increase from Q3, while growth would be seen in 2023 due to low bases in 2022. China’s gasoil demand is estimated to edge down 0.3% year on year to 4 million barrels/day in 2022, gasoline to fall 7.7% to 3.3 million barrels/day and jet fuel to slump 28.3% to 506,000 barrels/day.

GRM Rebounds

Last week the mean Singapore GRM inched up by $1.50 week-on-week $1.50/barrel, boosted by fatter crack spreads across all product categories. Improved demand in India and lower inventory in the US pushed the gasoline spread up by $1.62 week-on-week to $5.15/barrel (most positive for SPRC).

Furthermore, increased air travel activities across the globe, stronger demand from the West, and lower inventory in Singapore boosted the jet fuel and diesel spreads by $0.45 week-on-week to $24.92/barrel and by $2.41 week-on-week to $31.84/barrel, respectively. Also, a sharp drop in crude cost and diminished inventory in Singapore pushed the high-sulphur fuel oil spread up by $1.01 week-on-week to -24.26/barrel.

refining margins rebound as china’s starts to show some signs of recovery and oil prices rise amid plans for production cuts

Movement of Crude Price as of Oct 4, 2022

Suppata of Bualuang says that broad demand for refined products looks set to improve year-on-year through Q4 2022. Moreover, demand for diesel and high-sulphur fuel oil is projected to rise quarter-on-quarter in Q4 2022, boosted by high seasonal demand and gas-to-oil switching demand. Moreover, the global jet fuel demand is also projected to increase quarter-on-quarter during the same period in tandem with the easing of travel restrictions.

From the supply perspective, autumn refinery maintenance, the possibility of lower supply from Russia, and low inventory levels will be the factors limiting supply. Crude cost (crude premium) will tend to decrease quarter-on-quarter in Q4 2022 in tandem with crude prices.

Suppata says that the chemical spreads mostly fattened, driven mainly by a sharp drop in feedstock costs.

“Our top Chemical pick is still IVL, premised on strong 2022 core earnings growth. There’s also scope for upside from its long-term growth profile via future investments and/or acquisitions,” she said.