SINGAPORE (BLOOMBERG) - As a second coronavirus wave menaces Europe and the US, Asia is back in a familiar position: acting as a bulwark against faltering oil demand.
A surge in infections in Europe is already spurring more stay-at-home measures, while the US reported record new cases for a second straight day. That's evoking memories of April, when it was only the rapid rebound in Chinese consumption that kept prices from plunging even further than they did.
There are several differences this time round, however, which should cushion the market. The flagging demand isn't coinciding with a price war and, as virus fatigue sets in, authorities may be less likely to impose the major lockdowns they did earlier in the year. In Asia, China has been joined by the likes of India and Japan in holding a defensive line against the shaky global outlook.
"Asia is clearly leading the demand potential but there are concerns that China has by and large exhausted its crude import capacity for the year," said Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies. The region is also ahead on oil-product consumption, with the weakness in international air travel now the biggest drag, she said.
Across Asia, there have been numerous positive signs on demand of late:
China's apparent oil demand has been above year-earlier levels since April, although it's slowed from a peak in June. Traders are now snapping up crude for an expected jump in Chinese consumption when independent refiners get fresh import quota for next year.
Indian diesel sales rose year-on-year in the first half of October for the first time since a nationwide lockdown in March. That came after gasoline sales exceeded year-ago levels in September.
Japanese domestic gasoline and diesel sales are almost back to 95 per cent of pre-virus levels, Mitsuyasu Kawaguchi, general manager for crude oil and tankers at Cosmo Oil, said in mid-September.
Asian demand isn't back to pre-virus levels, however. Oil-product consumption in the region will be down by 5.4 million barrels a day in the final three months of 2020 from a year earlier, IHS Markit estimates. That compares with around 11 million barrels a day less in each of the first two quarters.
Fourth-quarter energy demand in the region could exceed current expectations if a colder-than-expected winter boosts heating oil consumption in North Asia, said Victor Shum, vice president of energy consulting at IHS in Singapore.
In the US market, IHS sees product demand down by 6.7 million barrels a day this quarter from a year earlier. Latin American consumption also looks set to be sluggish. The planned closure of Italy's Sarroch refinery is a sign forward expectations are deteriorating in Europe and a strong second wave of Covid-19 will keep fuel demand weak, data intelligence firm Kpler said in a note.
Within Asia, the recovery is uneven as refineries in countries with big domestic markets like China and India are better positioned to chip away at the massive stockpiles built up earlier in the year. That's in contrast to South Korea and Singapore, which are more reliant on exports.
Asian refining profits have also staged a partial recovery, largely on the back of higher margins for fuel oil and some improvement in demand for gasoline and naphtha. Complex refining margins in Singapore are averaging 46 cents a barrel this month, compared with -47 cents in September. They're still well below the five-year seasonal average of US$5.09, however.
Refinery run rates
Asian plants that are heavily exposed to their own domestic demand will cope better with fuel stockpiles still at bloated levels, said Sri Paravaikkarasu, head of Asia oil at industry consultant FGE. The drop in oil-product demand in the Atlantic Basin may see surplus European and US fuel cargoes heading to Asia, which could weigh on refiner margins, she said.
FGE sees average crude run rates at Asian refineries rising to 29.9 million barrels a day in November and December, from about 29.2 million barrels this month. Runs will then increase to 30.5 million in January before dropping due to spring maintenance work in February and March.
Chinese runs will rise 2.9 per cent this quarter from a year earlier, according to SIA Energy oil analyst Sengyick Tee. Indian Oil Corp., the nation's biggest refiner, is planning to increase its run rates to 90-100 per cent by the year-end, Chairman Shrikant Madhav Vaidya said last month. SK Innovation Co., South Korea's biggest processor, doesn't have any plans to ramp up activity, however.
Asia is leading the oil demand recovery, but while a second wave of the virus may stall the recovery in Europe, it's unlikely to go into reverse, according to Giovanni Staunovo, a commodity analyst at UBS Group. Consumption in the US is also still improving, he said.
"While the easiest demand gains are behind us, we believe the recovery in oil demand will still continue," Mr Staunovo said "But it will be uneven and at a slower pace over the coming months, until an effective vaccine becomes widely available."