Asian Refining Margins at Decade Lows

[HenryTo]

A cut in refining operations will continue to exert pressure on crude oil prices going forward:
--------------------------------------------------------------------------
WRAPUP 1-Asia oil refiners cut back as margins at decade lows
Wed Sep 6, 2006 2:07 AM ET

By Osamu Tsukimori and Cho Mee-young

TOKYO/SINGAPORE, Sept 6 (Reuters) - Major oil refiners in Japan and South Korea have curbed operations this week in an effort to revive deeply negative simple margins by limiting fuel output, industry and company sources said on Wednesday.

The cuts, the first broad reductions since a brief spate of curbs last November, may help boost prices of gasoline and other fuels, but could do little to rescue the ailing Asian market for fuel oil, the price of which has slumped to about $20 a barrel below the Middle East benchmark crude price, the widest gap ever.

Japan's top refiner Nippon Oil Corp. <5001.T>, which operates a quarter of the country's capacity, will cut back operations by about 23,000 barrels per day (bpd) to 816,000 bpd this month, versus its previous plan after a domestic fuel oil-fired power plant broke down.

That is 16 percent less than September last year and about a third lower than its full capacity, partly due to planned maintenance on several units this month.

GS Caltex Corp. -- a 50:50 joint venture between South Korea's GS Holdings Corp. <078930.KS> and U.S. major Chevron Corp. <CVX.N> -- has cut its planned refinery runs this month by 20,000 bpd to 600,000 bpd, an industry source said.

Top Korean refiner SK Corp. <003600.KS>, which produces large volumes of fuel oil, may follow suit, traders say.

Those cuts may help rebalance an oil market that dealers say is in danger of an extended autumn slump, with gasoline losing its premium to crude oil as the summer driving season ends and stocks of winter heating fuel already brimming in Asia.

The real drag on margins has been fuel oil, now in its deepest slump ever amid a tide of imports from the West, flat demand in China, the biggest consumer of the residual fuel and switching by U.S. users into cheaper natural gas.

"It is a plus for margins, especially for gasoline, but it may not boost Asia-wide fuel oil margins," said Hiroyuki Sakaida, an energy analyst at Credit Suisse in Tokyo. "The cut by Nippon Oil is a plus for rivals. Other refiners will not follow."

Other Japanese refiners contacted by Reuters said they had no plans to restrict output, although the overall industry continues to run about 10 percent below its full capacity, data show.

SIMPLE MARGINS IN SLUMP

The run cuts will provide more ammunition for oil market bears who say global prices <CLc1> -- which have retreated $10 from their mid-July record highs -- could fall further as crude and fuel production races ahead of slower-growing demand.

Gasoline, a pillar of support in the summer when it traded at a more than $20 a barrel premium to U.S. light, sweet crude, is now worth about $1.30 a barrel more than crude. <CL-HU1=R>

U.S. heating oil is $13 a barrel more than crude, but kerosene stocks in Japan, a key winter consumer, stand more than a fifth higher than this time last year, potentially pointing to a supply glut, according to data on Wednesday.

Asia's export-oriented refiners are often the first to cut runs in an effort to minimise losses, hoping that restricted oil product supplies will tighten markets and raise prices, while reduced crude imports may bring down global benchmarks.

"It's temporary rather than an omen for the future," said Enrico Sismondo, a Singapore-based industry consultant.

Upgraded, complex Singapore margins for refiners that produce more high-value transport fuels were $3.11 a barrel over the past week, half their average from July but still above the lows of late January, Reuters data show. <REF/MARGIN1>

Simple plants that produce more residual fuel are losing $3.21 a barrel and slumped last week as low as $5 a barrel, the weakest since Reuters data began in 1997.

"Going forward, the best we can hope for is for simple refinery margins to break even," said Victor Shum, an analyst with Purvin & Gertz in Singapore.

However, key refineries in China continue to run near full throttle, as Beijing pushes its oil majors to ensure sufficient supplies to the domestic market despite more than a year of refining losses as increases in retail fuel price failed to keep pace with soaring global crude oil markets.

Zhenhai Refining & Chemical Co. Ltd., China's biggest oil plant, will run at 365,000 bpd this month, slightly lower than in August, a company official said on Tuesday. (Additional reporting by Ikuko Kao and Neil Chatterjee)

[rffrydr]

The Chinese demand for fuel-oil, with an 11% GDP????? There's the real story.