Markets - Latin America and Asia good for product imports

May 26 2017

Despite plentiful supply of crude oil, Latin America has historically had to rely on product imports to supplement its domestic refining output.

The region has struggled to make progress on the refining front over the past few years, Gibson said in a report.

Much hope rested on Brazil, with several major projects under construction, many of which should have been operational today. Yet these projects have suffered continual setbacks, with all remaining projects on hold as Petrobras tries to rein in its Capex, following an economic and political crisis in the country.

However, it is not just Brazil that has struggled. Elsewhere in the region,refining in Venezuela has been particularly hard hit by a lack of investment and maintenance following the collapse in oil prices. Whilst the country boasts refining capacity of 1.3 mill barrels per day, which should make the country a net exporter, utilisation has been very low in recent months. Mexico has also had its fair share of issues, whilst in other parts of the region, little progress has been made on the refining front.

Until recently, the regions inability to bring on any major increases in refining capacity had coincided with a period of falling demand, in line with economic contraction in many of the regional powerhouse economies. However, despite the economic instability, product imports have seen growth over the past few years.

In 2016, the US alone exported 2.3 mill barrels per day of refined products to the region, of which over 0.8 mill barrels per day comprised of middle distillates. Whilst this represented growth of just 200,000 barrels per day over 2015, it must be considered that overall oil demand growth was declining during the period.

Now with some of the major regional economies recovering, demand growth in the region is set to return. Over the next five years the IEA forecasts regional demand to grow nearly 0.6 mill barrels per day. Whilst limited expansion in refining capacity is expected to come online over this period, higher utilisation (which is questionable) could contribute in part towards servicing higher demand. However, regardless of these developments, the region will be forced to import higher volumes of product.

Furthermore, BP has opened its first gas station in Mexico, with plans to open 1,500 over the next five years; Exxon has plans to invest $300 mill into the country’s retail fuel sector, whilst Glencore has announced its own partnership with a domestic player. However, neither Exxon, Glencore or BP have signalled any intent to invest in refining capacity in Mexico, pointing to higher trading activity in the region.

From a supply perspective, the US does of course maintain the geographic advantage; however, other regions such as Europe, may play an increasing role. Nevertheless, higher product imports are positive for the clean tanker market, whilst a slower expansion in regional refining capacity also supports crude exports.

As for the Asian MR market, Ocean Freight Exchange (OFE) said that a new lease of life had been breathed into this ailing market.

Earnings have slumped in recent months, as TC1 rates sank to a low of $240,000 in April on the back of lower product exports from China and South Korea, before rebounding to $290,000m due to an influx of activity in North Asia.

Overall, Chinese product exports hit a three month low at 3.5 mill tonnes last month, down by 22.6% month-on-month and 4.9% year-on-year, OFE said.

Diesel accounted for 1.2 mill tonnes - down 35% month-on-month, while gasoline accounted for 0.91 tonnes - up by 8.3% month-on-month. The drop in April exports was mainly due to heavy turnarounds at state-owned refineries, as well as lower product export quotas released by the Chinese Government.

However, the recent release of a new batch of fuel quotas under the general trade scheme coincided with a flurry of third decade May cargoes, which propelled MR rates to their current levels.

The third batch of quotas issued this year accounted for 6.29 mill tonnes, which is 35.7% higher than the previous batch. As the new export quotas become functional and refinery maintenance comes to an end, OFE expected to see a month-on-month increase in total exports for May and June, which may help MR rates in the region.

Similarly, South Korean total product exports hit a five-month low of 1.27 mill tonnes in April - down by 13.4% month-on-month and 9.3% year-on-year. A fall in gasoil and jet fuel largely accounted for the decline.

OFE said that one key factor behind this export drop was weaker Australian demand after cyclone ‘Debbie’ caused severe damage to Queensland coal mines, which are a major importer of diesel.

Australia accounted for around 35% of South Korea’s gasoil exports in the first quarter of this year and as coal mines operations resume, exports to Australia should recover over May and June.

The forthcoming Ramadan season may provide a short term boost to the Asian MR market, due to seasonally high Indonesian Gasoline imports, which are typically shipped from neighbouring Singapore. Pertamina recently released 2H17 tenders, which could lend support to this market, OFE concluded.   

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