Cheap oil and costly fuel are Harvey windfall for top market
The shutdown of almost a quarter of US crude refining capacity in the wake of Hurricane Harvey is presenting a rare opportunity for fuel traders in Asia.
A spike in American gasoline prices as the storm cuts off supplies is drawing shipments from as far away as Singapore. The disruptions are also weighing on global crude futures, helping drive up processing profits thousands of miles away from Harvey’s trail of destruction on the US Gulf Coast.
Returns from making oil products in Asia have soared to the highest level in more than two years. Even companies that aren’t transporting fuel west are benefiting, according to Indian Oil Corporation, the nation’s top refiner.
Traders have hired vessels to ferry at least 105,000 tons of processed products from Singapore to America next month, and are seeking to charter more. Tankers have been booked to transport gasoline from Europe to the US, and the fuel is now set to be shipped over even longer distances as the premium of American prices soar relative to those in Asia, the world’s biggest oil market.
Additionally, Indian Oil says demand is strong enough for refiners which do not export to stick to domestic markets and enjoy cheaper feedstock and higher fuel prices.
“Harvey is creating a dual benefit for Asian refiners,” said Arun Kumar Sharma, finance director at Indian Oil. “The shutdown of US refineries is pulling down crude prices and pushing up prices of petroleum products. This will have a double-impact on refinery margins, especially in Asia.”
The profit from turning a bbl of Dubai crude to fuel in Asia has soared to US$9.78/bbl, the most since June 2015, according to data compiled by Bloomberg. WTI crude, the US marker, slumped almost 4% the week through the 30th August while Brent, the benchmark for more than half the world’s oil, dropped about 3%.
After blasting along the Texas coast as a hurricane last week, Harvey made landfall a second time in Louisiana as a Tropical Storm, drenching the states in rain and hampering energy infrastructure. It reduced US fuel-making capacity by about 4.25 MMbpd to the lowest since 2010. A combined 23% of American capacity is at least partially offline.
Gasoline in New York jumped above US$2 a gallon for first time since 2015. Colonial Pipeline Company, the largest US conduit for the fuel, planned to halt its gasoline line on the 31st August because about half of Gulf Coast refining capacity was offline. Valero Energy and Royal Dutch Shell, both major Gulf Coast processors, told wholesale customers they did not have enough gasoline and diesel to sell retail suppliers.
Soaring US gasoline prices mean it is now profitable to send the fuel from Singapore to the U.S. The premium of Gulf Coast gasoline to prices in Singapore, the regional trading hub, surged to US$17.76/bbl on the 30th August, the most since at least 2011, according to data compiled by Bloomberg. The spread was at US$2.38 on the 21st August 21 before Harvey hit.
Meanwhile freight has risen by only US$0.80/bbl, according to Bloomberg calculations based on data from shipbrokers. A ship carrying 35,000 tons of gasoline would have cost the equivalent of US$3.47/bbl to charter earlier this month, excluding insurance and some other costs. That’s now risen to US$4.27/bbl.
“Refiners in Singapore, South Korea and India are capable of producing US gasoline specifications and will be able to meet increased demand in the US,” said Ehsan Ul-Haq, a London-based director of crude oil and refined products at Resource Economist. “Due to the lack of North American product supply, Latin America might also require products.”
Indian Oil has gained almost 5% this week, while Thailand’s IRPC Pcl has risen 4.4% and India’s Mangalore Refinery and Petrochemicals has gained about 12%. South Korean refiner S-Oil Corporation has risen about 6%, the biggest weekly increase since March, and SK Innovation Corporation advanced 4.4%.