The prices of low sulfur marine gas oil in Singapore is likely to face downward pressure in the near term amid China's decision to impose a new consumption tax on light cycle oil, a gasoil blendstock, which is expected to shift regional balances and lead to more LCO supply in Asia's bunkering hub, market sources said June 3.
China uses light cycle oil as an alternative to gasoil in the mining, industrial, agricultural, construction and fishing sectors and its consumption tax on LCO will come into effect from June 12."More LCO will go into the LSMGO pool, and most of it will likely come to Singapore given that it has the biggest pie [of bunkering in Asia]," a trader said.
Singapore ex-wharf LSMGO June term contracts were heard concluded at minus $1/b-$1.20/b to the Singapore 10 ppm sulfur Gasoil assessments, down from around minus 50-90 cents/b in May, which reflected the recent changes, market sources said.
Premiums for July are expected to be lower given that China's tax on imports of LCO will begin near mid-June, market sources said.
"Most of the LCO will arrive from H2 June," the trader added.
South Korea and India are typically the highest producers of LCO within Asia, with the former exporting most of it to China. South Korea's gasoil exports to China averaged about 7.73 million barrels/month, or 1.03 million mt/month, to-date in 2021, higher than the average of 5.72 million barrels/month, or 763,000 mt/month in 2020, showed the latest data from state-run Korea National Oil Corp, or KNOC. LCO was included as part of overall gasoil exports in the KNOC data.
However, the monthly average volume of South Korea's gasoil shipments to China could fall below 5 million barrels, or 667,000 mt, in the second half of 2021, according to multiple South Korean fuel marketers and refinery sources surveyed by S&P Global Platts.
LCO is typically offered at a premium to the Means of Platts Singapore 10 ppm gasoil on an FOB South Korea basis. Prior to announcement of the consumption tax in early May, LCO spot barrels were heard to have traded at around a premium of $2.50-$3.00/b for June-loading cargoes, up from April, when it was sold at a premium of about $1-$1.40/b for May-loading cargoes, gasoil traders said.
In comparison, 10 ppm sulfur gasoil for loading from South Korea averaged a discount of 70 cents/b to MOPS gasoil assessments over April, making exports of LCO more profitable than the middle distillate.
"LCO yields the best refinery margins, so some refineries may reduce run rates and produce other distillates like gasoline and jet fuel instead," a South Korea-based refinery source said, adding that while its refinery had secured LCO cargoes from other countries for supply to the LSMGO market in Singapore in H1 2021, they will have to switch to bringing in cargoes from South Korea from H2 2021.
Long term implicationsSingapore will not be able to absorb incremental supply of LSMGO since demand for it has been stable in the country at around 300,000 mt/month, market sources said.
"Every player will try to bring their cargo to Singapore as it is the bunkering hub," a second trader said.
In the long term, the market is expected to rebalance as smaller ex-wharf suppliers without economies of scale will be forced to exit the market, market sources said.
"LSMGO demand [in Singapore] is limited, some players will have to seek alternative markets, like buying from majors in Singapore and bringing cargo to Latin America, for example," the trader added.
