Only seven years ago the Asia-Pacific region was importing over 3 mbpd of oil products and oil demand was increasing at an average rate of 7% per annum, a growth rate that was widely expected to continue well into the new century. In this spirit of optimism, refiners embarked on an ambitious programme of refinery expansion designed to make Asia more self-sufficient in products. Then came the financial crash of 1997,closely followed by a US recession in 2001.
Oil demand growth stalled and when the new refining capacity came on stream it left some countries with surplus products while others found their import requirements sharply reduced. Consequently, the region’s oil product deficit has fallen by 1 mpbd since 1995, but its need for crude oil imports has soared by over 3 mbpd. Although Middle East oil producers have benefited from Asia’s increased crude imports, they have been hit by the fall in its product imports. Their eastern markets for middle distillates have shrunk as Asian supplies have increased.
In particular, South Korea is now a net exporter of both gasoil and jet/kerosene, while India once one of the largest importers of middle distillate is now self-sufficient in both products. Gasoil and kerosene prices in Singapore are now routinely lower than in the Atlantic Basin, whereas six or seven years ago the arbitrage was the other way around. Furthermore, tighter quality specifications across Asia have shut many Middle East refiners out of an increasing number of markets, since they have been slow to upgrade their plants to produce the required low-sulphur grades of diesel fuel.
This progressive move to higher quality products is also proving a problem for Asian refiners, who are now running larger volumes of sweet crudes from the Atlantic Basin. In the long run, however, as distillate demand increases, they will be forced to expand desulphurisation capacity. The shift in Asia’s oil trade balance has boosted demand for crude tankers on eastern routes. While the Atlantic Basin needs less long-haul imports of crude oil because of rising non-OPEC production, this is more than compensated for by the increase in refiners’ demand in Asia, where crude production has barely grown in the last three years.