Asia’s economy is outstripping the rest of the world – and demand for stocks is outstripping supply according to Priya Balchandani
Asia is undergoing phenomenal change.
Refinery capacity expansion is proceeding at an unprecedented rate, with the rate of expansion having been defined when the global economy was growing more rapidly than it is today. The global economy is currently growing at a slower pace, but Asia is growing faster than the rest of the world.
Dominant Asian market
China’s GDP continues to lead the charge – at a rate almost three times that of the US. Additionally, China’s contribution to global GDP has increased substantially, moving Asia’s role from being more dependent on the Western hemisphere’s performance to one that is far more independent. India’s role, combined with ASEAN’s, will likely be a larger contributor than China’s in the near future, reminding us of strong growth potential in the region.
There are areas of vulnerability on the macro front in countries such as Malaysia, South Korea and Indonesia, and we continue to monitor these areas to assess further impact. China’s refinery capacity has grown substantially – up by more than 0.5 million barrels a day (mb/d) in operational capacity to 10.5mb/d in 2014, and total capacity has grown to 15mb/d. We expect another 0.4-0.6mb/d in refinery capacity to come on-stream in 2015, and expansion to continue into 2016. Refinery margins held up well in the first half of 2015, but fundamentals have since tilted more heavily towards ample supply.
Singapore’s benchmark middle distillate spreads (both jet and gasoil) have consequently fallen to a single digit against Dubai crude in terms of US dollars per barrel. This margin compression is primarily due to regional supply increasing faster than demand in an already well-supplied market.
A result of faster supply growth than demand is an increase in stocks. Total onshore oil product stocks have grown by 45mb since the low in March 2015, with about 10% of total stock-build in Asia (including Singapore, South Korea and Japan). The low proportion of oil product stocks in Asia is partly due to the lack of infrastructure build-outs in bulk liquid storage in oil product-importing countries such as Vietnam, Indonesia and the Philippines, which would benefit from increased levels of oil product storage.
Half of the stock-build is in the US, and the rest in Europe. The bulk of the global oil product storage comprises gasoil (or diesel), which accounts for about 40% of the total; gasoline constitutes about 30%, jetkero around 5%, naphtha 5% and fuel oil 11%. This is a longstanding breakdown that we do not expect will change in the near term.
- Balchandani, director global research at Standard Chartered Bank will be providing a macro outlook on the Asian market including its impact on oil product fundamentals and storage dynamics at Tank Storage Asia’s conference at 2.30 on September 29 at Marina Bay Sands. For more information, click here.