On the other hand, the market has become increasingly focused on the squeeze on spare capacity which has emerged with increased output and exports from the leading members of the supply accord. This will keep price support in place over the next month or two, as overall crude demand remains high, with perceptions of greater tightness driving some additional upside risk in the event of further outages.

The extent of the reshuffle in crude flows due to various political elements is still not clear. In general, the expectation is potential rerouting of at least several hundred thousand  b/d of crude to weigh on the Brent complex, if it translates into a significant curtailment of Asia-bound US flows.

 Asian Product Markets

Light Distillates (gasoline, naphtha)

Singapore naphtha cracks crashed to a near two-year low in June, averaging -US$2.93/bbl due to high levels of LPG substitution in steam crackers and the weakness in the gasoline market. This has been also evident in Europe, with full-range grades weighed down by a relative lack of blending demand. While refinery yield shifts towards the middle distillate pool, could help take some of the pressure of the light ends complex .

Asian naphtha cracks, meanwhile, have recently rebounded a little after the West/East arbitrage spread had come under increasing pressure over early July. Support from petrochemical players to have firmed post-maintenance season is expected , while South Korean players have continued to pick up full-range cargoes to supplement condensate splitter intake. Nevertheless, the lack of support from the gasoline blending side is also apparent in Asia with Spore 95 mogas cracks having weakened in particular.

Middle Distillates (gasoil, jet fuel)

Gas oil/diesel cracks in the EoS have been recovering over the past few days from a sharp drop in June. Asian cracks have become increasingly dependent on shorts in the West as regional demand growth has struggled to keep up with the brisk pace of last year.

Q2-2018 demand increased by 170,000 b/d y-o-y, compared to 380,000 b/d  y-o-y growth in Q1-2018 and 450,000 b/d in Q4-2017. This, together with high crude intake growth and evidence of yield switching towards the gas oil/diesel pool from key markets such as South Korea, means that gas oil/diesel cracks have likely peaked for now. 

Jet/kero regards have been on the rise over the last few days. Regional demand growth has remained strong with higher prices being less of a pressuring factor here compared to road fuels and with an emerging middle class in key markets providing a boost to the aviation sector. Partly on the back of this, fundamentals for jet over the next months appear notably stronger than for the gas oil/diesel side. Meanwhile, European import requirements are set to continue rising with the balance there tightening by 60,000 b/d  m-o-m (15%), keeping a firm pull on arb barrels. 

Fuel Oil

Singapore fuel oil cracks have staged a spectacular recovery from April’s 22-month low of -US$7.7/bbl, averaging -US$2.8/bbl month-to-date. This is in line with Asia’s fuel oil deficit which is estimated to widen by 36 kb/d y-o-y in July. The drop in supplies continues to outpace the fall in demand with the ongoing startup of S-Oil’s 68.4 kb/cd RFCC unit.

On top of this, the largely unexpected return of Pakistan to the buyers’ market tightened the market further.

Indeed, Pakistani tender data for August suggests that imports may reach 120,000 b/d. However, it is noteworthy that most of these supporting factors (Iran is  the exception) will not last beyond September as peak power generation demand in the Middle East and Pakistan will have dissipated, while there will also be an uptick in incoming flows from the West given the currently favorable arb spread. 

Therefore, cracks are expected to weaken beyond September, ending the year at around -$5.50 per barrel.

We see some relevant changes to the global crude slate coming up over Q3 due to sizeable increases in Saudi Arabian and Russian crude production, most of which will be medium-gravity and below. At the same time, we are seeing a slowdown in US y-o-y production growth, while China may shun US barrels. Consequently, we expect to see Asian refiners process a more fuel oil rich crude diet in the near future.

Courtesy of Iran Petroleum