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As oil refiners ramp up output, concerns emerge over Asian glut

Tuesday, February 17, 2015 - 15:56
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A sharp rise in Asian refiner margins has raised concerns of a build-up in crude and oil products in the next few months as refiners boost inventories, potentially ending a recent rally that has lifted crude prices from six-year lows.

[SINGAPORE] A sharp rise in Asian refiner margins has raised concerns of a build-up in crude and oil products in the next few months as refiners boost inventories, potentially ending a recent rally that has lifted crude prices from six-year lows.

A products glut would coincide with the expected ramp-up of large new refineries in the Middle East, and could come as China is expected to scale down buying for its strategic petroleum reserves (SPR).

Tumbling prices for crude oil, which is refined into products such as gasoline and diesel, have improved margins for Asian refiners after years of low profits.

Singapore's refining margins have risen more than a third since December to their highest level in over a year.

Refiners normally reduce crude buying in the northern hemisphere's spring season, around May to June, when demand eases, using the time for maintenance. Yet with high refining margins, some producers may postpone maintenance. "Exceptionally strong refinery margins and a soft maintenance schedule may skew the normal seasonality of refinery runs and push more (price) weakness into early summer," Morgan Stanley said in a note on Monday.

Last year, high springtime refinery output resulted in oil product builds and weak margins in the early summer, triggering the start of a dramatic fall in oil prices from June.

Morgan Stanley said it expected "large inventory builds and pricing pressure for oil markets" in the second quarter of 2015.

The world's biggest oil trader Vitol also expects a dramatic build in oil stocks over the next few months as US production growth continues despite fewer active drilling rigs. "While the rig count is going down, we really don't see production coming down ... We see a dramatic build in stocks in the next few months," Vitol CEO Ian Taylor told a conference last week.

Adding to the glut in products, new refineries in Saudi Arabia and Abu Dhabi have begun operations this year.

While oversupply puts downward pressure on products, a slump in Chinese crude demand could also hit the market in spring as the government scales back its build-up its strategic reserves.

China has been taking advantage of low prices to increase its reserves and once that build-up is complete, which some analysts expect as early as May, oil imports are likely to slip.

REUTERS