Singapore oil refinery profits fall to two-year low

Singapore’s refinery margins, the Asian benchmark, crashed to US$2.94 per barrel this week. It dropped more than 70% since January, making it the lowest level the market has seen since August 2014.

The initial oversupply in gasoline and diesel has now spread and affected naphtha, a light distillate product mainly used as a petrochemical feedstock but which can also be blended into gasoline supplies.

Singapore’s margins for naphtha crashed 88% this year to US$17.15 per ton, a sharp decline from US$190 just two years ago and well off its long-term average of US$103 per ton.As a result of the glut, Singapore’s light distillate inventories have swollen by over 2 million barrels since late June to 15.1 million currently, a near record level, as refiners put unsold fuel into storage.

Once all storage possibilities had been exploited, refiners would have to cut back their crude processing runs and instead start selling down fuel from storage, said Oystein Berentsen, managing director for crude at oil trading firm Strong Petroleum in Singapore.

“Once the product tanks are full…, then you know that the situation is bad. You have to cut runs,” he said.

Many refiners, however, are reluctant to cut runs as long as they make some cash. According to Lee Yunhi, head of corporate planning at SK Energy in South Korea, they have no plan for run cuts.

Toshiaki Sagishima, executive officer at Idemitsu Kosan Co, Japan’s second leading oil refiner by sales, said last week that the company more than tripled its oil product exports during the April to June period to 347,000 kiloliters (2.18 million barrels) as international margins are better than those in Japan.

Japanese refiners said that beyond maintenance outages, they were unlikely to stop selling fuel abroad as long as it generates some profit.

Meanwhile, Chinese gasoline exports have almost doubled since the beginning of the year, to a record 1.1 million tons in June (9.3 million barrels), and diesel exports remain near record highs of over 1 million tons (8.25 million barrels).

Despite Brent crude trading relatively cheaply in the low $40s per barrel, the outlook for refiners remains gloomy.

Researchers at AB Bernstein said that in 2012-2014, Brent averaged US$106 per barrel and refining margins were at US$3 per barrel. The consensus expects a Brent average of US$56 per barrel and refining margins of US$3 per barrel in 2016-2018.