Asian refining margins hit their lowest seasonal levels since 2020, a direct consequence of rising refined product inventories and weaker demand, particularly in China.
Industry analysts note that the end of the summer travel season has led to a drop in demand for diesel and gasoline, putting further pressure on margins.
Data from LSEG show that complex refining margins in Singapore, a barometer for the region, fell to USD 1.62 per barrel, marking a 68% drop on the previous month.
This situation is leading some refiners to cut production to avoid excessive inventory build-up.
Production cutbacks and inventory surpluses
Since May, several refineries in Asia, including those in China, have adjusted their production by reducing refining volumes by 400,000 to 500,000 barrels per day.
Prospects of a further 300,000 b/d reduction are being raised for the fourth quarter, with a potential additional 100,000 b/d cut if margins do not evolve favorably.
Diesel margins are at 18-month lows, while cash discounts for 10 ppm sulfur diesel are at their lowest level in four years.
This reflects a market in contango, where immediate prices are below those of the months ahead, a sign of oversupply.
China’s slowing economy is also weighing on energy demand, contributing to this general decline in margins.
Added to this, European demand for diesel remains weak, limiting the possibilities of selling Asian surpluses to other markets.
The Formosa Petrochemical spokesman points out that refineries in Northeast Asia are facing high inventories with few distribution options, apart from regional outlets such as Singapore and Australia.
Refining Strategies and the Contango Market
Refiners’ strategy in this context of low margins is mainly based on cautious inventory management and calibrated production cuts.
The contango structure observed on the diesel and gasoline markets reveals abundant supply in the face of stagnant demand.
In this scenario, margins are likely to remain under pressure unless demand picks up significantly, whether through an economic recovery in China or growth in seasonal demand in other regions.
Market players are keeping a close eye on developments in global demand, and any further disruption in supply could rapidly alter the market balance.
For the time being, refineries are having to navigate carefully, balancing production cuts with anticipation of future needs.
