Oil Traders Knocking on Rising Buyer's Door May Be Rebuffed

(Bloomberg) -- One of the most promising emerging markets in Asia may be set to curb purchases of fuel from abroad, intensifying the hunt by sellers for new customers at a time when Chinese supplies are swamping the region.

A $9 billion refinery south of Hanoi is seen enabling Vietnam -- one of a handful of economies in Asia still growing more than 6 percent a year -- to cut diesel and gasoline imports from neighbors including South Korea, Singapore and Malaysia. The country’s move toward self-sufficiency comes just as another giant petroleum complex in Malaysia prepares to open in 2019, raising fears the market will be awash as China exports record volumes.

The new Vietnamese refinery adds to “the regional gasoil surplus and pressures exporters in the region, especially at a time when China continues to export a record amount of diesel,” said WengInn Chin, a senior oil market analyst at industry consultant FGE. “Exporters from South Korea, Singapore and Malaysia will definitely be hurt by this and will have to look for other outlets.”

Oil Traders Knocking on Rising Buyer's Door May Be Rebuffed

The flood of Chinese exports has been particularly painful for refiners in 2018, with regional profits from making diesel and gasoline sinking 23 percent and 51 percent, respectively, from the year’s high to their lows. The pain may worsen, with the new plants in Vietnam and Malaysia adding a total 500,000 barrels a day of processing capacity to the emerging nations. That’ll erode their incentive to buy from sellers looking for new homes to ship products.

Vietnam’s new plant, a joint venture among local as well as foreign partners including Kuwait Petroleum Corp. and Japan’s Idemitsu Kosan Co., has a crude-processing capacity of 200,000 barrels a day and began supplying fuels to the local market in May. The Nghi Son Refinery and Petrochemical facility is the nation’s second after the Dung Quat project, and its website says it’s due to reach full capacity and commercial production by the end of the year.

Nghi Son and Dung Quat combined may be able to supply 70 percent of the country’s fuel consumption, Phan The Rue, the chairman of the Vietnam Petroleum Association, told news website Petrotimes in May.

The new plant also reflects a recent trend where Middle Eastern crude producers build refineries in Asia to secure sales in the world’s biggest oil-consuming region. Kuwaiti crude exports to Vietnam’s Nghi Son refinery have been on the rise since the second quarter, and Saudi Arabia may be hoping to see a boost in shipments to Malaysia given it backed the $27 billion refinery and a petrochemical complex there.

A Fuel Glut

While that strategy could boost flows of Middle East crude to Asia, the knock-on effect could create a fuel glut in the region. China’s diesel exports have been surging, and the region’s average profit from making the fuel plunged 11 percent in June from a month earlier, and it averaged $14.43 a barrel in July.

In addition, both jet fuel and gasoline prices in the region moved to contango, a market structure that signals reduced market tightness due to rising output from Vietnam’s new refinery, according to the International Energy Agency.

Still, Vietnam’s capacity addition may fall short of fully offsetting its domestic demand for diesel. Last-known historical data places consumption at about 145,000 barrels a day, and it’s forecast to grow at a robust pace over the coming years, according to Peter Lee, an analyst at Fitch Solutions.

Also, stricter emissions requirements for tankers that begin in 2020 will make shippers replace dirtier fuels with cleaner ones like diesel and may further boost appetite for the fuel in the region.

But for now, the flood of diesel from China, coupled with the increasing refining capacity, is raising concerns for oil processors in the region.

“The Nghi Son start-up is a key event for the region,” said FGE’s Chin. “Gasoline and gasoil imports into Vietnam should start to slow down gradually starting about now.”

©2018 Bloomberg L.P.