Lower crude propels V-shaped recovery in Asian refining margins

Quantum Commodity Intelligence - Falling crude oil prices over fears that Omicron will hit demand for transport fuels is pushing up oil product cracks in Asia to near post-pandemic highs, providing a "V-shaped" recovery in refining margins, according to Quantum data this week.

Transport fuels in Asia have recorded the sharpest rebounds, somewhat ironically, given they are likely to suffer the most in terms of demand destruction as a result of any mobility restrictions imposed by governments to tackle the spread of the variant.

Gasoline cracks in Asia are approaching a two-month high and those in Europe are at a one-month high, while for diesel, key ULSD markers in both regions are at the highest for at least four weeks.

And for jet fuel, cracks are now approaching a post-pandemic high in Asia, all despite the fact that the airline industry is most likely to suffer from any looming travels restrictions over the next few weeks.

Asian jet cracks are now $4-5/b higher than where they were at the market's low point at the end of last month – assessed by Quantum Wednesday at $10.50/b versus Brent.

The rise in cracks is due to retreating crude prices amid fears of a surplus and large stock build in the first quarter. 

Surplus

In its latest report, the IEA sees the crude surplus at 1.7 million bpd in the first quarter, up sharply on its November estimate of 600,000 bpd for Q1, aided by the release of strategic reserves of crude by the US and other major consumers.

Since November 26, when news of the variant broke, Brent has rebounded but is still around $4/b down from the closing Asian assessment that day, while product prices in Asia have mostly risen over the same period by $0.50-80/b, providing a boost for refiners.

Indeed, using a simple refining calculator, refining margins in Asia are now at their highest level since October, which was only a brief spike that lifted margins to a post-pandemic high.

The rise comes as scientists say Europe is about to experience its biggest wave of Covid yet in the form of the Omicron variant.

So far, very few countries have imposed movement restrictions to tackle the outbreak, leaving demand for fuels relatively unchanged, versus a speculator-led sell-off in crude with net long positions held by managed money positions in WTI and Brent at their lowest for more than a year.