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Oct. 10 (Bloomberg) -- The returns from refining crude oil in Asia are poised to rebound from the lowest levels in three years as companies seek to stem declines by slowing production and shutting plants for maintenance.
Profits in Singapore from processing Dubai crude at so-called complex refineries, which can make higher-value fuels, will rise to $3.78 a barrel this month from their September average of $2.04 a barrel, according to KBC Energy Economics. Four of six oil analysts, traders and refiners surveyed by Bloomberg through Oct. 4 also forecast margins will recover.
Rising crude prices and a slump in local currencies from the yen to the rupee to the Taiwan dollar are driving up costs for refiners such as Japan’s JX Holdings Inc., Indian Oil Corp. and Formosa Petrochemical Corp. just as slowing industrial output in the region’s biggest economies curbs fuel demand. Producers shut about 1.4 million barrels a day of capacity for maintenance in September, the most in four months, and are poised to halt a similar amount in October, according to KBC.
“In view of current poor margins, Asian refiners are likely to cut runs in the coming weeks, which will help to provide some support,” said Jit-Yang Lim, a senior consultant with KBC in Singapore. “At the same time, planned maintenance in the region is expected to rise.”
Asian refining margins fell to the lowest since April 2010 last month, according to KBC. BP Plc’s refining market margin, a benchmark indicator for global processing profits, slumped 30 percent to $13.60 a barrel in the third quarter and has since averaged $10 a barrel, according to the company’s website. Returns in Australia, the marker for the Asia-Pacific region, shrank by 19 percent last quarter.
The decline in profits will prompt refiners to scale back processing rates in coming weeks, according to seven of nine market participants surveyed by Bloomberg. Two said there would be little change.
Global crude processing is forecast to drop to 76.8 million barrels a day in the fourth quarter from 77.2 million in the previous three months, the International Energy Agency said in a monthly report on Sept. 12. Operating rates in developed Asian economies will increase by 3 percent to 6.8 million barrels a day, according to the IEA.
The “poor state” of global refining reinforces the need for a “material reduction” in crude runs, Adam Longson, a New- York based analyst at Morgan Stanley, said in an e-mailed report dated Sept. 26. “Current economics should justify refinery restraint. Weak refinery margins and rising product stocks only reinforce demand pressures, suggesting run cuts are imminent, if not under way.”
Formosa Petrochemical, which was operating its Mailiao refinery in Taiwan at about 75 percent of capacity after restarting a crude-distillation unit on Sept. 10, is in “no hurry” to boost throughput because it has sufficient stockpiles of products such as diesel and jet fuel, the company said Sept. 17. Run rates at South Korean refineries were at 76.1 percent in August, the lowest for the month since at least 2008, when Bloomberg began tracking the data from Korea National Oil Corp.
“The volume driver is diesel, and the overall sentiment is either muted or negative,” said N. Srikumar, a former executive director of Indian Oil in Mumbai who retired on Sept. 30. “If the volumes themselves are getting muted down, then there is no point in processing crude just because you have a capacity.”
Demand for Diesel
Chinese manufacturing expanded less than economists forecast in September. The Purchasing Managers’ Index was at 51.1, the National Bureau of Statistics and China Federation of Logistics and Purchasing said Oct. 1. It was 51 in August.
India’s diesel demand has increased 2 percent this year, compared with 7 percent in 2012, according to IHS Inc., an energy consultant. Diesel consumption fell for a fourth month in August as the removal of subsidies for industrial users prompted them to focus on alternative fuels, India’s Ministry of Petroleum and Natural Gas said.
“We have seen lower year-to-date oil-demand growth rates in India and Indonesia,” said Yam Chuan Baey, associate director of downstream energy research at IHS Inc. in Singapore. “Supply is likely to tighten due to run cuts by refiners after two months of poor refining margins.”
Singapore’s inventories of middle distillates, a category of oil products that includes gasoil and kerosene, rose to 10.9 million barrels in the week to Sept. 18, the highest level since Jan. 30, according to data from the trade ministry. Supplies were 18 percent higher from a year earlier.
“At the very least, diesel demand is set to pick up seasonally in the winter months,” Amrita Sen, chief oil analyst for Energy Aspects Ltd. in London, said in a Sept. 16 report. “China’s gasoil demand should continue to show modest improvement through the next few months as well.”
China’s demand for gasoil dropped to 3.443 million barrels in August, according to data compiled by Bloomberg. That’s still about 4 percent higher year-on-year.
Weakening Asian currencies have hurt refiners because they buy crude oil denominated in dollars. The Bloomberg-JP Morgan Asia Dollar Index, which tracks the region’s major currencies except the yen, slumped to 113.58 at the end of August, the lowest level since September 2010. India’s rupee has lost 11 percent against the dollar this year, while Indonesia’s rupiah has retreated almost 13 percent.
Depreciating currencies “will certainly weaken the crude demand,” said Gordon Kwan, head of regional oil and gas research at Nomura International Ltd. in Hong Kong. “Ultimately, if there’s less demand for gasoline and diesel, then refineries will produce less.”