Q2 2020 China Refined Oil Market Forecast

SCI99

2020-03-25

Q2 2020 China Refined Oil Market Forecast

In Q1, due to the global public health issue and the crude oil price war launched by Saudi Arabia, the international crude oil prices kept slumping. As a consequence, the prices of refined oil in China dropped sharply. SCI suggests that in Q2, participants should adopt cautiously optimistic attitude and purchase on a need-to basis.

From the beginning of 2020, the international crude oil prices trended down. In January, the global crude oil market suffered from oversupply, and the crude oil inventory in the U.S. rose. After the break of public health issue later, participants adopted bearish attitude toward the crude oil market. Moreover, Russia refused OPEC’s suggestion to cut its crude oil output, and Saudi Arabia started a crude oil price war. Accordingly, the prices of international crude oil began to slump.

The sharp decrease in international crude oil prices led to a significant drop in China’s refined oil retail ceiling prices. On March 18, China’s National Development and Reform Commission cut the retail ceiling prices of gasoline and diesel by RMB 1,015/mt and RMB 975/mt respectively, and that was the largest drop in retail ceiling prices since December 2008.

Next, SCI will forecast the refined oil market in Q2 based on the supply-demand fundamentals, participants’ sentiment, etc.

Short-term forecast:

Currently, the refined oil inventory at state-owned refineries is still at a high level, and they are likely to maintain their operating rates at relatively low levels for a short period. Meanwhile, China will promote its refined oil exports to cut inventory pressure, and SCI estimates that the refined oil volume in March will be around 6 million mt. However, due to the aggravation of public health issue in foreign countries, there are risks that China’s refined oil export volume may decline. As for independent refineries, with more and more independent refineries resume to normal operation, the operating rates at independent refineries will gradually revive.

In Shandong, many traders replenished their inventory when the refined oil prices were high, and they are likely to sell their inventory at low prices to recoup funds. Meanwhile, many refineries also purchased crude oil when the international crude oil prices were high, and they are also likely to sell their products at low prices to recoup funds and purchase low-priced feedstock. Therefore, low-priced refined oil resources from both refineries and traders will co-exist in the market for a short-period.

After the international crude prices fell below the price floor set by China’s NDRC, China’s refined oil retail ceiling prices will not drop further, and the gasoline and diesel retail prices at petrol stations will stay largely stable. Though the profits at petrol stations drop to some extent, the profits are still at relatively high levels.

Long-term forecast:

Though Saudi Arabia started the price war, its economic development highly relied on crude oil market. Therefore, the price war is unlikely to last for a long period, and the future international crude oil prices are likely to revive. SCI reckons that after the easing of the global public health issue and the end of the price war, the international crude oil prices may surge dramatically.

For upstream refining & chemical integrated refineries, considering the procurement and transportation of crude oil and the production cycle, if they promote crude oil procurement now, they will enjoy profits from May or June. The decrease of international crude oil prices will significantly reduce refineries’ feedstock cost, boost their profits and compensate their losses caused by the high-priced crude oil they purchased before.

For mid-stream traders, with the public health issue in China gradually coming to an end, the refined oil demand keeps reviving. The refined oil prices are at low levels, and many participants will be active in speculation. Therefore, from a long-term perspective, the future refined oil wholesale prices will rebound after fluctuating at lows.

For downstream petrol stations, more and more enterprises will resume operation, and the civilians’ use of cars will gradually improve, supporting the sales at petrol stations. SCI estimates that the sales at petrol stations will revive to normal levels in May. The wholesale prices of refined oil are at relatively low levels, and the profits at petrol stations still perform relatively well. Therefore, some petrol stations may cut their prices further to promote sales and enhance their customers’ stickiness.

.......

Please click "Read more" for more information