“Driven by China’s and India’s appetite for petroleum products and continued capacity rationalisation, we believe refining margins will remain firm, thereby supporting the growth in earnings,” says Rachel Chua, a Moody’s Assistant Vice President and Analyst.
“Specifically, we expect the average Asian refining margins to be largely in line with the average of US$6.2 per barrel for the last three years, but better than US$5.1 per barrel in 2016.
“The recent forced closure of about a quarter of US refining capacity has created an undersupply situation, causing fuel prices including gasoline, diesel and jet fuel to surge. Nonetheless, we expect the recent spike in crack spreads and refining margins to temper and normalise as the supply crunch eases gradually,” she says.
Moody’s conclusions are contained in its just-released report, “Refining and marketing – Asia, Outlook stable on modest Ebitda growth and firm refining margins”.
This outlook reflects Moody’s expectations for the fundamental business conditions in the sector over the next 12-18 months and has been stable since October 2014, when Moody’s initiated its outlook opinion.
Supply and demand will vary by country, but for the region as a whole, Moody’s estimates that Asia’s incremental growth in demand for fuel of around 0.7 million barrels per day (bpd) will outpace net refining capacity additions of 0.4-0.5 million barrels per day (bpd) over the next 12-18 months.
At the same time, the bulk of the incremental growth in refining capacity will come from China and Vietnam. Still, with demand growth surpassing capacity additions over the last five years, Asia is likely to remain a net importer of refined petroleum products over at least the next three years, the international rating agency notes.
Rising demand for diesel will keep diesel crack spreads healthy. The modest pace of industrial activities in the region and China will drive demand for diesel, which is a transport fuel and is also used in the agriculture, mining and construction sectors.
Meanwhile, gasoline demand and gasoline crack spreads will remain supported by low pump prices as global crude oil prices continue to stay below US$60 per barrel.
Diesel and gasoline typically make up around 60% of Asian refiners’ product slate.
However, Moody’s adds that Asian refiners continue to be exposed to the economic slowdown in China, industry cyclicality and geopolitical risks, despite the rating agency’s stable outlook.
“We could change our outlook to negative if net refining capacity additions and increasing refinery output in Asia materially outpace growth in demand, such that our projected Ebitda for the industry declines by more than 10%; or if demand from China and India contracts; or if geopolitical developments materially alter operating conditions,” it adds.
Moody’s would consider a positive outlook if regional demand overwhelms capacity additions such that refining margins exceed US$8 per barrel on a sustained basis, leading us to raise our Ebitda-growth forecast above 10%.