Asia to rewrite oil products trading map

Asia to rewrite oil products trading map

SINGAPORE (Reuters): A huge build-up in refinery capacity in Asia is set to rewrite the oil trading map for the region during the next few years, analysts say.

Demand will eventually pick up to absorb the extra supply, but in the meantime Asian buyers of oil products will have a stronger negotiating position in determining prices than ever before.

Traditionally, Asian buyers have scrambled to get enough supplies of both crude and products, giving the sell side of the market the upper hand in price negotiations.

But for the next few years the tables will turn as far as oil products are concerned.

Analysts are split on whether products supply to Asia will be in surplus overall in 2000 and 2001, or even for longer, but Asia will either have the narrowest ever deficit or its first surplus.

Credit Suisse First Boston forecasts Asia would have a net surplus in 2000 of 133,000 bpd, swinging back to a deficit in 2001 of 226,000 bpd.

Analysts estimate Asian refinery capacity will grow more than two million bpd in 1999 and 2000, half the growth coming from India.

Kang Wu, an analyst at the Hawaii-based East-West Center, said China was expected to raise refinery capacity 646,000 bpd between 1998 and the end of 2000.

By early 2001, Formosa Petrochemical Corp.'s 450,000 bpd refinery will be running. The first of three 150,000 bpd crude distillation units is due up this December.

Traditionally, sellers have courted big volume demand countries like India, China and Japan -- which combined guzzle more than half of Asia's product consumption of 18.4 million bpd.

Modest growth in these centers represent big volume business.

But by the middle of next year India will effectively be out of the major league of importers.

Analysts estimate that in 2000/2001, import demand will be tiny given the new refinery capacity. The government expects a 270,000 bpd surplus in 2001/2002 (April-March).

Japan's oil demand growth, like its economy, is stagnant and with refineries running at 75 percent utilization there is capacity to absorb an increase in demand, if and when it occurs.

That leaves China as the only main growth area in the next few years.

But while oil traders might seek to ramp up business with the giant oil consumer, the country's domestic oil priorities rule out major product import growth for the next few years.

It has an import ban on diesel and gasoline in place. That may crumble in the pursuit of entry to the World Trade Organization (WTO), but Chinese industry sources and analysts said the government would seek concessions to maintain its import quota system to control the flow of imports.

"The quota system will stay for another three to five years," a high-ranking official with Sinopec said.

If anything, the overall volume of China's imports is shrinking. The diesel ban saw diesel imports fall to 61,000 bpd in 1998 versus 123,000 in 1997.

Between January and the end of July, the rate of China's diesel imports slumped again to just 7,300 bpd, down 93 percent from the same period in 1998.

Sinopec and CNPC are seeking a government mandate to produce more fuel oil, which would displace imports. Fuel oil imports represent around 75 percent of China's annual imports of some 20 million tons, or 400,000 bpd.

This leaves the sell-side of the market -- comfortable for decades with constant demand growth -- with some painful adjustments, analysts said.

Asian oil product demand in the next few years will be driven more by the niche markets. With little demand to drive price competition, a seller will have to compete by shedding costs or being first with finding sales opportunities.

"The ability to survive will come down more and more to the skill of a company's chartering manager or shipping broker. It will be a question of how much extra cents per barrel you can squeeze on the shipping side," said Tom James, an independent energy consultant and chairman of SwapNet, a trading system.

Arbitrage opportunities to sell oil products to other regions will be critical, particularly for the Middle East which sends most oil exports to Asia and traditionally dominated the India market.

Oil majors and big trading companies, with their global presence, have a natural advantage. It will be essential for others to enter into marketing tie-ups, or open offices around the world to ensure global cover, analysts said.

"Any real trading opportunities could well be on the arbitrage side," James said.