China refinery runs (kbpd) to Jun 2020
We think Asian refiners face risk from higher China product inventories
Despite a 57% decline in floating oil product inventories around Singapore in the past three months, Asian refiners continue to face challenges as China's July oil product inventories (gasoline +33% YoY, diesel +49% YoY) surged, with refinery output up / oil product demand . We note that higher inventories could present an overhang to China and APAC oil product markets, and any recovery in APAC refining margins could lead China's exports up. Also, Middle East crude official selling prices (OSP) have been rising, with Arab Light/Heavy Q3 premiums at US$0.6/bbl vs. Q2 discounts of US$5.6/bbl. We remain cautious on Asian refining margins recovery in the near term, and we reiterate our negative stance.
China oil product exports may rise in Q420 after remaining benign YTD 2020
China gasoline and diesel exports growth has been declining since the beginning of 2020 and had provided some relief to regional refiners in a subdued demand environment. China exports declined due to lower Asian margins and higher freight costs making these exports uneconomical. However, with SCI99 pointing to a surge in China oil product inventories in July, it would imply exports might resume in Q420 if margins recover with a recovery in demand. This may further delay the regional refiners' recovery.
Capacity additions, strengthening official selling prices and lower demand weigh on refiners
Additional factors affecting refiners' profitability include: 1) continued refining capacity additions (we estimate a gap of 2.7mb/d in refining supply/demand over 2020-22); 2) our estimate of a delay in oil demand recovery to pre-COVID-19 levels to mid-2 021; 3) Middle East producers OSP (official selling price) discounts in Q220 turning to premiums in Q320 over Dubai crude; and 4) increased fuel & loss costs due to recovery in oil prices. We remain cautious on Asian refiners, with UBS APAC refining margins at US$2.9/bbl in 2020E and US$4.5/bbl in 2021E.