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Asian gasoil profit margins surge to highest Sept levels in 6 years

Singapore

ASIAN refining profit margins for gasoil have surged to their highest levels for the month of September in six years, buoyed by expectations for higher demand as the shipping industry looks ahead to switching to cleaner marine fuels next year.

New regulations from the International Maritime Organization (IMO) will force shippers to reduce the sulphur content in fuels used in their vessels starting from Jan 1, 2020, and one way to do that is to switch to low-sulphur gasoil.

Refining profit margins, also known as cracks, for gasoil with a sulphur content of 10 parts per million (ppm), are currently at their strongest September levels since at least 2013, Refinitiv Eikon data showed.

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The cracks for the benchmark gasoil grade also hit a near 10-month high of US$18.52 a barrel over Dubai crude last week.

"Gasoil cracks receive structural supports ahead of IMO 2020 as some traders are building up inventories for low sulphur blending components in trading hubs," said Vima Jayabalan, research director at consultancy Wood Mackenzie.

IMO 2020 is expected to lift gasoil demand by 1.4 million to two million barrels per day (bpd), according to industry analysts.

The recent attack on Saudi Arabian oil facilities could also tighten gasoil supplies in Asia, especially ahead of the IMO demand surge, further boosting the margins, trade sources said.

The attacks on state-owned Saudi Aramco's crude processing facilities at Abqaiq and Khurais cut output by 5.7 million bpd and threw into doubt its ability to maintain oil exports, although the return to full production may happen faster than originally expected.

"The Saudi attack obviously sparks worries over supply shortfalls (in Asia)," a Seoul-based trader said on Wednesday, declining to be identified.

"The key driver behind bullish middle distillates is anticipated demand from IMO 2020. However, we believe that the market is overly bullish," said Richard Gorry, managing director at JBC Energy Asia.

When new global rules limiting the amount of sulphur in shipping fuels were announced, marine gasoil was declared the early winner since most grades readily meet the new 0.5 per cent limit on sulphur content.

But with about 100 days remaining before the IMO rules come into force, analysts and traders increasingly agree that very-low-sulphur fuel oil (VLSFO) is likely to become shippers' mainstream fuel as it is cheaper and also compliant.

"We would expect middle distillate cracks to weaken from January onwards. Obviously this is also a major risk for those refiners and others who believe that IMO will be very good for gasoil," Mr Gorry said. REUTERS