Asian Crude Oil Markets Struggle to Recover Amid Weak Demand

Asian crude oil markets have been recovering slowly this year, but the rise in prices has been less enthusiastic than in the US and North Sea markets. Oil traders and refiners in Asia are skeptical about the current price rally, pointing to weak demand and negative refining margins. The Organisation of Petroleum Exporting Countries (OPEC) and some non-OPEC producers have pledged production cuts, but the impact has been limited in Asian crude oil markets.

Key Takeaways:

• Refining margins in Asia are negative, with oil traders and refiners viewing the current price rally with suspicion.
• Demand in Asia, particularly for products like gas oil, remains poor, and refining capacity is still coming on stream.
• The Organisation of Petroleum Exporting Countries (OPEC) and some non-OPEC producers have pledged production cuts, but the impact has been limited in Asian crude oil markets.
• The price of Asian benchmark crude, Malaysia's Tapis, has risen by only $6.50 a barrel, compared to the $8.50 a barrel increase in West Texas Intermediate (WTI) crude.
• Refining capacity in Asia was expanded dramatically in the early 1990s, but the crash in mid-1997 left Asian refiners struggling to recover.
• Indian Reliance Refinery will come on-stream with a daily capacity of 540,000 barrels a day, and the large Formosa Refinery in Taiwan will also expand its capacity in September.
• Australian refiners, such as Caltex, are feeling the pinch of poor refining margins, with margins significantly worse than last year.
• Oil stockpiles in Asia, especially in South Korea, have been drawn down, and refining capacity in Korea is rising, which is expected to lead to a gradual rebalancing of supply and demand in the region.

Statistics:

• Tapis crude has risen by approximately $6.50 a barrel since its December low.
• West Texas Intermediate (WTI) crude has risen by $8.50 a barrel, or 80 per cent, from its December low of $10.35 a barrel.
• Refining margins in Asia are negative, with a discount of approximately $1.25 a barrel to WTI crude.
• Refining capacity in Asia was expanded dramatically in the early 1990s, with two new refineries built in Thailand and three refineries expanded in Korea.
• The crash in mid-1997 led to a collapse in demand for oil products, particularly gas oil, and a squeeze on refining margins.
• Refinery capacity utilisation rates in Asia fell to around 65-70 per cent, according to Woodside Petroleum's John Richards.

Sources:

• "Financial Times Limited 1999. All Rights Reserved."