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 Crude oil <LCOc1> has rallied more two-thirds from its mid-January
nadir on robust demand from refineries worldwide, stoking cautious
optimism among producers and exporters that the epic rout that
slashed global prices by 75 percent between mid-2014 and early 2016
is finally over.
But rampant production of oil products, especially in Asia, is
threatening to derail that recovery. Several major gasoline
importing countries have started to export, as excess supplies of
fuels overflow storage facilities and erode refinery profits.
"Asia has overcapacity in refining, so that's ruining margins," said
Oystein Berentsen, managing director for crude at oil trading firm
Strong Petroleum in Singapore.
"Japan is exporting and product stocks are still building. In China,
new refiners are exporting as much as they can, so they're flooding
the market. At some stage, the refining overcapacity will have an
effect on crude."
Soaring output has left the world awash with cheap crude as supply
exceeds demand by 1 million to 2 million barrels per day.
 That should be good news for refiners, but "crack spreads" - the
difference between the cost of crude and its refined derivatives
often used to estimate refining margins - on most oil products have
slumped in Asia lately as output exceeds demand, causing inventories
to swell.
Even gasoline margins - the biggest source of profits for most
refiners over the past year - are down nearly 40 percent since March
as storage hubs such as Singapore, where inventories <STKLD-SIN> are
near historic highs of 15 million barrels, struggle to cope with the
glut.
With Asia's big emerging economies driving most demand growth, the
effects will be felt globally.
"Asia contributed more than 50 percent of global gasoline growth
last year," said Energy Aspects analyst Nevyn Nah. "Yet gasoline
cracks are way lower this year compared to the same time last year
because supply has overwhelmed."
Oil market analysts at Barclays said on Monday that "non-OECD
product exports... have the potential to move prices lower over the
next several months".
FALLING PROFITS
Asian benchmark refining margins <DUB-SIN-REF> started 2016 near
multi-year highs, spurring refiners to churn out as much fuel as
they could.
The impact of that oversupply was felt first in products such as
heavy oil, including fuel for large ships that has been hit as Asian
economies have slowed, and diesel, the main fuel for heavy industry.
Diesel margins in China have fallen to six-year lows.
And margins are coming under pressure in Europe and North America
too, although they are still better for refiners than in Asia.
"People have spent a lot of money in the past three to four years
... to make more diesel because that's what the world was desiring,"
said John Auers, executive vice president at consultancy Turner,
Mason & Co.
The remaining bright star in refining had been gasoline, also known
as petrol, backed by roaring car sales in China and India, where a
combined 3 million new vehicles hit the road every month.
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In the United States, petrol demand is also strong, yet data from
the U.S. Energy Information Administration (EIA) shows that stocks
are only just below their highest levels seasonally since data
became available in 1990.
RISE OF THE TEAPOTS
Gasoline margins in Singapore <GL92-SIN-CRK>, Asia's pricing
benchmark, have collapsed by half since the beginning of the year to
just over $7 per barrel as new exports hit the market.
In Japan, where petrol demand is waning because of the stalling
economy, a falling population and the rise of electric cars,
refiners that used to import crude to supply home markets now target
international buyers.
"Domestic demand is on the decline," said Yasushi Kimura, president
of the Petroleum Association of Japan (PAJ), a refiners and
distributors body, adding that as a result producers were "pursuing
business opportunities overseas".
And in China the rise of independent refiners, known as teapots, has
driven exports of gasoline and diesel as refineries churn out more
fuel than even fuel-thirsty China needs.
China's diesel exports soared 316.5 percent in March from a year
earlier to 1.25 million tonnes, customs data showed on Thursday.
Gasoline exports rose 9.1 percent to 670,000 tonnes.
With similar developments in Taiwan, Asia is seeing so much gasoline
flooding the markets that even the rise of India isn't able to
absorb the surplus.
In Singapore, traders have started storing excess gasoline aboard
tankers as they run out of onshore storage.
Goldman Sachs already warned late last year that an emerging glut in
refined products would eventually spill back into the crude market.
"If all the major consumers sell off their gasoline, it begs the
question who will buy it?" said one Singapore fuel trader. "The
answer is that much will remain unsold and in storage, and once that
happens prices will crash."
(Additional reporting by Osamu Tsukimori in TOKYO, Jessica
Resnick-Ault and Catherine Ngai in NEW YORK; Editing by Alex
Richardson)
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