Asian cracking margins reversed the falling trend and showed a sharp recovery across the product slate in January, on the back of strong regional demand with bullish market sentiment. The weaker seasonal gasoline market showed a sharp recovery in the Singapore gasoline cracking margin, reacting to stronger regional demand in a tight market. Gasoline market sentiment was fuelled by stronger demand from Indonesia, Vietnam, Malaysia and Sri Lanka, with the latter due to operational problems in the Kelaniya refinery. In contrast, expected tighter supplies boosted the positive sentiment, due to upcoming refinery maintenance, in conjunction with healthy gasoline demand in the Asia-Pacific, planned Indian refinery maintenance in February, and announced refinery shutdowns in the Middle East due to turnarounds at the Riyadh and Ras Tanura refineries.
The naphtha crack also posted a sharp recovery, as worries of a tightening in supply outweighing the currently lacklustre performance of global demand. Refinery shutdowns in Europe limited arbitrage movement to the East, with some support also stemming from rising propane prices in Northwest Europe, making naphtha the preferred petrochemical feedstock. The demand side was supported by increasing buying interest from the petrochemical sector, mainly from Japan, South Korea and Taiwan, while demand from China remained subdued, due to the Lunar New Year holiday. Additional support will be expected over the coming weeks on news of a reduction in Indian naphtha exports, due to scheduled maintenance at Reliance´s Jamnagar II refinery; however, the petrochemical maintenance season could offset this. The gasoline crack spread against Dubai crude in Singapore recovered by a sharp $6.6 to average around $11.2/b in January.
The middle distillates market remained relatively well balanced, as the supply-side supported the market, with heavy maintenance scheduled in February fuelling tightening sentiment. Furthermore, some refineries continued maximizing the production of kerosene for heating purposes, keeping gasoil supplies comparatively tight amid strong regional demand, mainly from Sri Lanka and China, as well as India where higher requirements of diesel were needed to replenish low inventories in the east of the country, caused by the increased use of diesel powered back-up generators in the face of growing power shortages. However, higher production of kerosene and the marginal arbitrage opportunities to the West exerted some pressure on regional supplies and capped gains in gasoil margins. The gasoil crack spread in Singapore against Dubai showed an increase of 90˘/b from the previous month to average around $20/b in January. At the bottom of the barrel, fuel oil cracks showed a sharp recovery of $5 to display a premium of $4.5/b over Dubai, the highest level seen in two years. Market sentiment was bearish on the supply side in December, due to higher inflows; however, the sentiment became bullish at a time of stronger bunker fuel demand in Singapore, increasing feedstock requirements from Chinese independent refiners, and healthy regional utility demand.