Asia’s imports of crude oil are on track to return to pre-Iran conflict levels, but flows of refined products are still constrained and fuel prices reflect the supply stresses.
The world’s top energy-consuming region is expected to import about 22.18 million barrels per day (bpd) of crude in June, up from 20.35 million bpd in May, according to data compiled by commodity analysts Kpler.
The June arrivals are still below the average of 26.76 million bpd in the three months leading up to the February 28 attack on Iran by the United States and Israel.
However, they are well above the eight-year low of 18.77 million bpd in April, the month most affected by the effective closure of the Strait of Hormuz by Iran during the conflict.
It’s also likely that the reopening of the narrow waterway through which as much as 20% of global crude and refined products moved prior to the conflict will allow more oil to reach Asia in July.
It’s also worth noting that China, the world’s biggest crude importer, is continuing to limit imports, with Kpler tracking only 5.76 million bpd of seaborne arrivals so far in June.
While this figure is likely to be revised higher prior to the end of June as more cargoes are assessed, it does confirm that China dramatically cut back on crude imports in response to the higher prices caused by the Iran war.
China’s seaborne imports dropped to the lowest since February 2018 in May, with Kpler data showing arrivals of 6.78 million bpd, down from an average of 11.37 million bpd in the three months before the start of the Iran war.
While crude imports are recovering in Asia ex-China, it appears to be more of a struggle to get flows of refined products back to pre-war levels.
Asia’s refiners are expected to export about 9.20 million bpd of light and middle distillates in June, up from 6.99 million bpd in May and 6.28 million bpd in April, which was the weakest month in Kpler records going back to 2017.
While this may look like a solid recovery, the June figure is still 13% below the 10.56 million bpd shipped in the three months before the start of the conflict on February 28.
Refined product inventories have also been drawn down in many Asian countries, meaning the market for fuels such as diesel and gasoline remains tight.
FUEL PRICE PREMIUM
This is reflected in prices in the region, which have declined from the record highs hit during the conflict, but are still elevated relative to the price of crude.
Global benchmark Brent crude futures ended at $80.57 a barrel on June 19, a premium of 11.2% to the close on February 27 and down 36.3% from the war peak of $126.41 hit on April 30.
The refined product most impacted by the conflict was jet fuel, given it generally has the smallest inventory buffer and degrades faster than other fuels.
Singapore jet fuel ended at $112.49 a barrel on June 19, still 20.4% above the $93.45 that prevailed the day before the war started.
Gasoil, the building block for diesel, finished last week at $111.61 a barrel, up 22.1% from the $91.42 on February 27, while gasoline ended at $103.56, up 30.6% from its pre-war close of $79.30.
With Asia’s refiners starting to see improving levels of crude arrivals, it’s likely they will start to increase processing rates and lift the supply of refined products.
Refinery margins remain high given the premium of fuels over crude, with a typical Singapore refinery enjoying a profit of about $11.51 a barrel, a 34% premium to the average of $8.59 for the past year.
How quickly the supply of refined fuels can return to pre-war levels depends on whether crude keeps flowing through the Strait of Hormuz and whether the market is confident that the United States and Iran can keep to their ceasefire agreement.
For the medium-term picture it will be more important to monitor vessel movements through the strait than to follow the social media bluster from the various parties to the conflict, even though the latter is likely to drive day-to-day movements in crude futures.
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The views expressed here are those of the author, a columnist for Reuters.
(Editing by Jamie Freed)