Refining frenzy worsens fuel glut in Asia

Asia is drowning in Chinese fuels and things are about to get worse over the next three years as new refining capacity in the world’s second-largest economy begins operating.

According to Bloomberg columnist David Fickling, the teapots—China’s independent, private refiners—are the main driver of the glut that is choking off Asian refiners’ margins and pressuring prices.

Indeed, the emergence of independent refiners in China accounted for a large portion of the import surge witnessed in the past four years. China is what every commodity analysts looks to when it’s time to forecast the demand prospects of one commodity or another.

Oil demand growth in both China and the Asia-Pacific as a whole has been strong, but even strong demand could slacken off and this seems to be what’s happening with China. Unfortunately, it is happening as plans to boost local refining capacity are being put into action.

China’s downturn of economy has also limited car sales leading to less gasoline demand. Diesel demand will this year fall for the first time ever, too, according to CNPC. More fuels will need to be dumped on neighboring markets.

Meanwhile the International Energy Agency (IEA)noted in its Oil 2019 annual report, “The global refining industry faces a wave of new capacity additions to 2024 that would greatly exceed demand growth for refined products, and this may result in refinery closures to rebalance the market.”

Refiners around the world are expected to add 9 million bpd of new capacity through 2024, the Paris-based agency said in its report, noting that China is expected to overtake the United States as the world’s leader in installed refining capacity.

“Given that these new additions far exceed the increase in demand for refined products, plant closures might be necessary to rebalance the market, though questions remain as to where and when that will happen,” the IEA noted.

In its monthly Oil Market Report in January this year, the IEA said refiners face a challenging year in 2019, with processing capacity set to increase by 2.6 million bpd, the biggest growth in four decades, “while margins are already pressured by low gasoline cracks due to oversupply and weak demand.”

Shekhar Ghosh is consulting editor, Indoasiancommodities.com. He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He can be reached at shekhar.ghosh@indoasiancommodities.in.

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