Asia's refining margins for diesel hit a fresh record on Tuesday (Jun 7) but may start cooling off as early as next month as refiners ramp up output and the upcoming monsoon season threatens demand, traders and analysts mentioned.
Rising fuel prices globally have contributed to runaway inflation and generated big profits for refiners as economic growth and the recovery from the pandemic strain supplies. If diesel prices stabilise or fall, then inflationary pressures may ease.
Refining margins for 10 ppm gasoil in Singapore, a benchmark for diesel, jet and heating oil in Asia - ended Tuesday at a record of US$56.75 a barrel over Dubai crude, having soared more than 60 per cent in the last two weeks, according to Refinitiv data that goes back to 2014.
The remarkable rise in profits for diesel is encouraging refiners from South Korea to India to prioritize output of the industrial fuel and step up exports to Asia and also Europe, which is seeking to replace Russian supplies ahead of an European Union embargo to phase out Russian oil products in eight months, the sources mentioned.
China's demand is also set to rebound as Beijing relaxes strict COVID-19 lockdowns, they said.
"Eased restrictions in China will no doubt spur a demand recovery," said Sandy Kwa, a senior analyst at the Boston Consulting Group.
"On the other hand, downside (for demand) is expected from the monsoon season happening in some countries, on top of high diesel prices denting consumption."
Industrial activity and road travel typically slow down during the monsoon.
But export flows to the West, where diesel demand is strong and supplies tight, would prevent Asian prices from falling far, market watchers said.
There is strong competition between Asia and Europe for fuel exports from the Middle East and India, said Jane Xie, a senior oil analyst at analytics firm Kpler.
Kpler expects refining margins for gasoil to fall as output increases. Kpler forecasts the 10 ppm gasoil cracks to average around US$24 to US$26 a barrel in the third quarter, and slipping to about US$20 to US$21 a barrel in the fourth quarter.
"We are expecting Q3 to have more supplies in the East of Suez, and Asia in general," a Singapore-based gasoil trader said.
"But we should see more workable arb (arbitrage) to the West during the third quarter," he said, adding that barrels from the Middle East and west coast of India will make up most of the exports heading to Europe.
Asia's diesel exports stood at 8.51 million tonnes in May, 1.2 per cent higher from April, Refinitiv Oil Research assessments showed.
"With refiners in the West prioritising gasoline over diesel to meet seasonal demand, diesel supplies are expected to remain tight at a time when refiners are already operating their refineries near capacity," said Serena Huang, senior market analyst at oil analytics firm Vortexa.
"It's not a question of whether the East-West arbitrage will remain open, but rather, how wide it is and how much flows will be heading to the West," she added.