(The opinions expressed here are those of the author, a
columnist for Reuters.)
* GRAPHIC - Asia's crude imports vs. Brent price: https://tmsnrt.rs/3uGyhqB
LAUNCESTON, Australia, June 3 (Reuters) - Crude oil futures
have climbed to an 18-month high, but the physical market in the
top-consuming region of Asia is lagging the gains amid ongoing
soft demand and contracting refinery profit margins.
Brent crude futures reached an intraday peak of
$71.48 a barrel on Wednesday, the highest since January 2020,
before ending at $71.35, while the U.S. benchmark West Texas
Intermediate reached $69.00 during the session, its
highest since October 2018.
The rally in the two biggest crude futures contracts came
amid optimism of a rebound in demand, especially in North
America and Europe, as well as the decision by the OPEC+
producer group to stick with their plan to gradually ease
production curbs through July.
But the optimism on display by investors in paper crude
isn't exactly being reflected in Asia, where physical demand
appears lacklustre and pricing for cargoes appears to reflect
the region's ongoing struggles to contain the coronavirus
Asia's crude imports in May were provisionally assessed by
Refinitiv Oil Research at just 23.07 million barrels per day
(bpd), down from 24.54 million bpd in April, 24.79 million bpd
in March and February's 25.2 million bpd.
While China, the world's largest crude importer, is likely
to have eked out a small gain in May from April, the rest of the
region's top importers all showed softer outcomes.
China is estimated to have imported 10.03 million bpd in
May, up slightly from the official customs outcome of 9.86
million bpd in April, but below March's 11.69 million bpd.
Refinery maintenance is likely behind some of the restraint
in China's imports, but there is also the possibility that
refiners are choosing to limit purchases given softer demand for
exports of refined fuels and ample stockpiles.
India's imports were estimated by Refinitiv at 3.90 million
bpd in May, down from 4.46 million bpd in April.
The weakness in May comes ahead of the impact from the
current coronavirus wave sweeping across the world's second-most
populous country, which has seen fuel demand plummet.
Gasoline sales plunged by 19% in May from April, while
diesel consumption dropped by 19.9%, according to data compiled
by state refiners.
It's likely that fuel sales will struggle to show much
improvement in June, although if early signs that the
coronavirus is being contained continue, it's likely India's
demand will return by July.
But the impact on crude imports will be felt with a lag, in
other words, the next couple of months may be weak and a
recovery likely only from August onwards.
Japan, usually Asia's third-biggest crude importer but now
under threat of losing that position to South Korea, saw inbound
shipments of 2.19 million bpd in May, down from April's 2.65
South Korea's imports were 2.45 million bpd in May, down
from April's 2.73 million bpd, while the refining hub of
Singapore also recorded lower imports in May from April.
Lower imports across Asia were accompanied by a drop in
refinery profit margins, which have slipped to levels seen last
year during the economic lockdowns imposed to combat the spread
of the coronavirus.
A typical Singapore refinery processing Dubai crude is
currently getting a gross margin of about $1.31 a
barrel, down from an average of $2.10 in May and $2.67 in April.
By comparison, a U.S. Gulf coast refinery processing WTI is
enjoying a margin of $11.11 a barrel, while a unit in Rotterdam
using Brent is receiving $3.50 a barrel.
The softness in Asia's crude demand and refinery margins is
showing up in the differentials between prices, with the
Brent-Dubai exchange for swaps <DUB-EFS-1M>, which measures the
premium of Brent crude over Dubai, rising to $3.28 a barrel on
This is up from a low so far this year of 72 cents a barrel
on Jan. 5 and a total reversal of the situation that prevailed
in March and April last year, when strong Chinese demand for
crude saw Dubai trade as much as $6.43 above Brent.
Another measure to look at the difference between the paper
market and the physical is to compare the front-month Brent
contract with the three-month Dubai swap.
The front-month Brent contract shows the immediate sentiment
in the investor market, while the three-month swap shows what is
happening in demand for physical cargoes, which are arranged
several weeks before delivery.
Brent futures ended at $71.35 a barrel on Wednesday, a
premium of $3.93 a barrel to the three-month Dubai swap.
This spread has blown out from just $1.01 a barrel at the
end of last year and $2.91 at the end of April.
Overall, the current optimism in the crude paper market is
almost entirely based around the recovery underway in North
America and Europe, home to the majority of traders and
investors in the market.
The question is whether ongoing weakness in actual physical
demand in Asia will eventually filter through to the paper oil