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'Armada' of Asian gas oil

Sam Fletcher
OGJ Senior Writer

An “armada” of gas oil will soon sail from Asia to Europe in response to “genuine demand” created by sustained low runs due to poor margin performance by European refineries at a time of a growing surplus in Asia, said analysts at Deutsche Bank.

They cited estimates by Reuter’s news service that 5 million bbl of gas oil will load in late September-early October in Japan, South Korea, and Taiwan for European ports.

“Asian gas oil demand growth rates so far this year have been stellar (averaging growth of 9.2% year-to-date),” said Soozhana Choi, Deutsche Bank’s head of commodities research in Asia. However, he said, “Refinery capacity growth in the region, which has been dominated by China and India, has been equally stellar.”

In Europe, on the other hand, refinery runs in 2009 were 1.1 million b/d below 2008 levels, and runs so far this year are down an additional 300,000 b/d. “As a consequence, the massive surpluses in gas oil inventories that was a feature of onshore Organization for Economic Cooperation and Development European balances last year has been tamed to some extent,” Choi reported. “As of end-June, European gas oil stocks were brought down to 40 days of cover from 46 at the start of this year. In Asia, refinery runs rose 300,000 b/d in 2009, and year-to-date runs are up 1.5 million b/d.”

The trend in Asia is driven entirely by non-OECD countries, China in particular, said Choi. China’s refinery runs so far this year are up 1.2 million b/d, or 17% year-over-year. According to the Paris-based International Energy Agency, the imbalance in Asian gas oil fundamentals is reflected in the steady rise of gas oil from Asia to Europe.

“In the first 6 months of this year, Asian gas oil exports to OECD Europe were up 46% year-over-year, largely attributed to India,” Choi reported. Exports from Asia now represent about 17% of Europe’s total gas oil imports from non-European sources, up from its 10% share in the same period last year.

“This surge in gas oil exports in the first half of the year is to some extent out of sync with the historical relationship between European gas oil premium to Singapore gas oil, which in our view reflects the extent of the surplus in the Asia region chasing arbitrage opportunities,” Choi said.

Oil price ‘stuck’
At Standard New York Securities Inc., part of the Standard Bank Group, analyst Walter de Wet said crude appeared “stuck” in the middle of the $70-80/bbl range it’s been trading in recent months and seemed to be desperately seeking positive news in terms of oil demand or signs of an improving economic outlook. As a result, he said, “We still believe better economic data will be seized on and likely have a disproportionate effect on prices, whereas middling to poor data is priced in already.”

De Wet said “We are increasingly looking towards distillate inventory levels in the US for…direction in crude oil prices as we head towards winter. However, we recognize that financial markets remain an important driver of oil prices in the short-term. Looking at short-term correlations, crude oil is taking direction from US equity markets (and to a lesser extent the dollar).”

Adam Sieminski, chief energy economist for Deutsche Bank in Washington, DC, said, “The energy sector remains the worst performing sector since the end of last year. Like 4 years ago, energy returns continue to struggle with a negative roll return. Despite weak physical fundamentals, oil prices may find some support from the US midterm elections, which have typically proved bullish for US equity markets.”

He said, “The downside risk comes from the potential for disappointing global economic news to offset the historical gains that have accompanied prior US elections cycles.” Sieminski noted the weakness of the dollar is not providing as consistent support for WTI as in 2009.

(Online Sept. 20, 2010; author’s e-mail:

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