Gasoline glut spells bleak years for refiners

More losses are expected due to additional output capacity in Asia and the Middle East as US demand falls

SINGAPORE: Refineries in Asia face falling gasoline prices and growing losses in producing the fuel, as the prospect of a sustained global supply glut looms over the industry in the next few years. After more than five years of robust profits, the value of gasoline against benchmark Brent crude has slid into discounts last month, and more losses are expected due to additional output capacity in Asia and the Middle East as US demand falls.

“We are just seeing the tip of the iceberg in terms of the whole gasoline situation,” said Vijay Mukherji, head of Middle East and South Asia research at FACTS Global Energy in Singapore.  Asia would see an excess of about 500,000 barrels per day (bpd) of gasoline in 2010 against 80,000 bpd last year, data from the consulting firm showed.

Gasoline production capacity in this region will jump nearly 20% to 5.2 million bpd in 2010, compared to last year. During the period demand will rise 10% to 4.7 million bpd. Globally, some 7.354 million bpd of secondary unit capacity-producing higher-value products such as gasoline, diesel, jet fuel and naphtha-will come online from this year until 2013,  the International Energy Agency (IEA) said.

The oversupply and shrinking margins have forced refiners worldwide to reduce output, the latest being in Asia, with some plants in Singapore, South Korea and Thailand trimming crude runs. Older plants in Europe and Japan could shut for good, if they fail to vie against sophisticated facilities in the Middle East and India, where Reliance Industries’ new 580,000-bpd refinery will produce 8-10 million tonnes of gasoline a year from early 2009. Japan and Europe might each see some half a million bpd of capacity shut in coming years, Mukherji said.

Gasoline margins measured against Brent crude-known in the industry as crack spreads-were around minus $0.50-$1 in the past week, and have sunk to as low as minus $4 a barrel in the last one month.

This is in stark contrast to premiums of more than $10 seen two months ago. “I expect overall margins to come down in the next couple of years and that’s really the result of the supply capacity coming on,” said Victor Shum, analyst at Purvin and Gertz in Singapore.

“Not just grassroots but also conversion projects that will increase supplies of light products.” The gasoline crack spread could have fallen further if not for resilient demand in Indonesia and Vietnam, Asia’s top gasoline importers, traders said. But even Vietnam’s gasoline imports could be reduced, with the planned start-up of its first 140,000-bpd refinery in Dung Quat next February and the 200,000-bpd Nghi Son plant by 2013.

Higher global production is exacerbated by declining gasoline imports into the United States, where demand was hit by recent surges in prices and a weakening economy, dampening shipments from Europe, which supplied 500,000-600,000 bpd last year. Gasoline exports to the world’s number one consumer last year from South Korea, Singapore and Japan of 24,000-27,000 bpd (1.04-1.17 million tonnes), have slowed to a trickle this year.

Exports only picked up recently as the summer driving season comes to an end, with shipments of up to 90,000 tonnes to the US West Coast. “I see US gasoline demand getting even weaker,” said Jim Ritterbusch, president of US-based Ritterbusch & Associates, who sees a 3% fall in on-year demand.

“We have seen some price decline at the retail level lately, however I don’t think it’s going to be enough to reverse the conservation trend we have seen this year.” The lower consumption will be worsened by increased ethanol blending, set to bring US gasoline deficit to 772,000 bpd in 2010, down almost a third versus 2007, Purvin & Gertz data show.

“US gasoline demand growth will significantly affect the decision making among Asian refiners as that’s the natural home for exports. They will have to very closely watch what is happening to the ethanol situation,” Mukherji said. But the Middle East, especially Iran and Saudi Arabia, needs to plug its gasoline deficit, at 130,000-140,000 bpd in 2007, offering short-term relief to sellers, Mukherji said.

However, the shortfall will shrink to 30,000-40,000 bpd in two years and the Middle East will have a surplus of 200,000 bpd by 2012-2013, he added. China, which became a net gasoline importer for the first time in May, is unlikely to remain a sales outlet, given its string of new refineries and upgrade plans, unless the projects are delayed by shortages of raw materials such as steel. “If China’s gasoline demand continues unabated and the refinery projects get delayed, then the imports by China will increase,” said Purvin & Gertz’s Shum. Producers must bite the bullet to rescue prices.

“We have suppliers looking for markets and having a hard time finding them. What that means is that refiners will have to cut back on operating rates to reduce supplies,” said Shum.