- POL product cracks moved erratically during May-20, aided by limited upsides priced into the demand scenario and underlying crude benchmarks recovering (May-20/FY20TD Arab light Average of US$26.3/54.1/bbl), as May-20 HSD/MS crack to Arab Light for the month averaged US$+1.9/-1.7/bbl standing below FY20TD average of US$+8.3/+US$1.1/bbl, where HSD cracks slipped drastically (-74%MoM) during the month
- HSFO cracks retraced back to 3QCY19 levels falling 7.8xMoM to US$-5.5/bbl, where global industrial demand (April-20 PMIs at all-time lows), container traffic (falling despite Chinese ports restarting operations) are likely to keep margin recoveries short-lived, while among major product spreads, MS crack to Arab Light rose 70%MoM
- As global economic activity shows initial signs of recovery and economic priorities drive long term policy responses to COVID-19 pandemics (particularly developing and low income economies), Asian POL product demand is expected to drive refined fuel demand higher, where recovery in HSD margins is much needed for rescuing refining margins (HSD constitutes 43% of 8MFY20 refining output)
- With about 48% of cumulative refining output at gross loss (MS/FO constitute 22/26% of 8MFY20 output), refinery output is expected to remain limited. A comparison of recent correlations between international POL benchmarks and ex-refinery pricing for HSFO/HSD/MS shows rising correlations over FY20TD vs. 3YR hist. avg., implying US$ stability as the key lever for keeping domestic POL prices low.
Not all recoveries are the same: Even before the impact of the N-COV 19 outbreak rattled markets, outlook for refined fuel demand seems bleak, with major Asian markets undergoing a period of lower demand for transportation fuels and IMO 2020 keeping a lid on HSFO benchmarks POL product cracks moved erratically during May’20, aided by limited upsides priced into the demand scenario and underlying crude benchmarks recovering (May’20/FY20TD Arab light Aver-age of US$26.3/54.1/bbl), as May’20 HSD/MS crack to Arab Light for the month averaged US$+1.9/-1.7/bbl standing below FY20TD average of US$+8.3/+US$1.1/bbl, where HSD cracks slipped drastically (-74%MoM) during the month. HSFO cracks retraced back to 3QCY19 levels falling 7.8xMoM to US$-5.5/bbl, where global industrial demand (April’20 PMIs at all-time lows), container traffic (falling despite Chinese ports restarting operations) are likely to keep margin recoveries short-lived, while amongst major product spreads, MS crack to Arab Light rose 70%MoM
Outlook: As global economic activity shows initial signs of recovery and economic priorities drive long term policy responses to COVID-19 pandemics (particularly developing and low in-come economies). With about 48% of cumulative refining output at gross loss (MS/FO constitute 22/26% of 8MFY20 output), refinery output is expected to remain limited. A comparison of re-cent correlations between international POL benchmarks and ex-refinery pricing for HSFO/HSD/MS shows rising correlations over FY20TD vs. 3YR hist. avg., implying US$ stability as the key lever for keeping domestic POL prices low.
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