Q2, 2019 Refined Oil Wholesale Prices Dropped Significantly
In Q2, 2019, the international crude oil prices first increased and then dropped, and after that, the prices rebounded. The WTI was $66/bbl in April, and the prices first kept declining to nearly $50/bbl and then started rebounding. Currently, the WTI is around $60/bbl and is still far from its peak in April. In China, the retail ceiling prices of gasoline and diesel totally experienced three increases and three decreases in Q2, 2019. On the whole, the prices of gasoline and diesel dropped, and the prices of gasoline dropped sharply. As a consequence, the prices of diesel exceeded the prices of gasoline.
The price trend of international crude oil in Q2, 2019 resembled the price trend in Q2, 2018, but there are two differences. First, the average international crude oil price in Q2, 2019 was lower than that in Q2, 2018. Second, in Q2, 2018, the international crude oil prices turned from increasing to dropping in June, and then the prices started rebounding in July. In Q2, 2019, the international crude oil prices turned from increasing to declining in May, and then the prices started rebounding in June.
In Q2, 2019, the demand for refined oil remained sluggish, and the gasoline and diesel prices dropped. According to SCI’s statistics, up to June 28, the average price of 92Ron gasoline was RMB 6,404/mt, down 20.68% from last year. The average price of 0# diesel was RMB 6,598/mt, down 4.25% from last year.
Now, SCI will briefly analyze the industrial hotspots in Q2, 2019:
First, in terms of China’s policy, China’s retail ceiling prices of gasoline and diesel totally experienced three increases and three decreases. Therein, on June 11, the retail ceiling prices experienced the largest drop in 2019.
From the beginning of 2019, China’s retail ceiling prices of gasoline and diesel totally experienced 8 increases and 4 decreases. On the whole, the retail ceiling price of gasoline increased by RMB 265/mt, and the retail ceiling price of diesel increased by RMB 275/mt. In Q2, 2019, the retail ceiling prices of gasoline and diesel experienced 3 increases and 3 decreases. Therein, on April 13, the retail ceiling prices of gasoline and diesel increased by RMB 155/mt and RMB 150/mt respectively. On April 27, the retail ceiling prices of gasoline and diesel increased by RMB 195/mt and RMB 185/mt respectively. On May 14, the retail ceiling prices of gasoline and diesel decreased by RMB 75/mt. On May 28, the retail ceiling prices of gasoline and diesel increased by RMB 50/mt. On June 12, the retail ceiling prices of gasoline and diesel decreased by RMB 465/mt and RMB 445/mt respectively. On June 26, the retail ceiling prices of gasoline and diesel decreased by RMB 120/mt and RMB 115/mt respectively.
On the whole, China’s policy in Q2, 2019 led to the bearish refined oil market, and due to the relatively weak demand for gasoline and diesel, the prices of refined oil may drop further.
Second, in terms of refined oil supply, though the operating rates of primary processing units at refineries kept declining, the refined oil supply remained largely ample.
In Q2, 2019, many of China’s refineries experienced turnarounds, and the average operating rate stayed at a relatively low level. According to SCI’s statistics, up to June 13, the average operating rate at state-owned refineries was 72.74%, down 1.65% from late May. However, from mid-June, many refineries restarted their units, and the operating rates started increasing. Up to June 27, the average operating rate at state-owned refineries was 76.41%, up 3.67% from that on June 13.
Due to the rainy season in southern China, the demand for diesel revived slowly, and the demand for gasoline remained largely stable. The tepid demand led to the decrease of gasoline and diesel prices.
Third, the prices of diesel exceeded the prices of gasoline in Q2, 2019.
Due to the oversupply, China’s refined oil market remained sluggish for a long period, and the prices of gasoline slumped. As a consequence, the average price spread between gasoline prices and diesel prices kept narrowing, and finally, the prices of diesel exceeded the prices of gasoline in many regions. Meanwhile, many refineries kept increasing their gasoline/diesel output ratio, and the increase of gasoline supply also led to the decline of gasoline prices.
Fourth, the competition among gas stations keeps intensifying.
From May, many gas stations started sales promotions and attracted many media attentions including CCTV. According to SCI, the mainstream price cut of 92Ron gasoline at Sinopec’s and PetroChina’s gas stations in Hebei, Henan, Shanxi, Zhejiang and Fujian was around RMB 1-1.5/L, and a few gas stations even reduced their prices of 92Ron gasoline by RMB 1.8-2.5/L. The major reason led to the sales promotions is that the competition between gas stations keeps intensifying, and with the growth speed of gasoline demand slowing down, many gas stations have to cut their profits to seize market shares. Meanwhile, the average price spread between 92Ron gasoline wholesale prices and retail prices keeps increasing, giving support to the sales promotions at gas stations.
Fifth, diesel prices continued increasing due to relatively short supply.
In China, the refined oil market used to suffer from oversupply, and the supply of refined oil rarely became short. Moreover, the demand for diesel used to be tepid. However, in June 2019, the diesel supply in Jiangsu, Zhejiang, Shanghai, Anhui, etc. became short at the same time, and the prices of diesel started increasing. There were two reasons led to the short diesel supply. First, many participants had been decreasing their diesel inventory before June, and their diesel inventory dropped to a relatively low level in June. Second, many refineries experienced turnarounds in June, and the output of diesel decreased. Moreover, it is rational in the market that prices rebound after long-period decrease.
Next, SCI will forecast the international crude oil market and China’s refined oil market in Q3, 2019.
In terms of the international crude oil market, SCI reckons that the international crude oil prices in Q3, 2019 will keep reviving, and the WTI will increase to $70/bbl.
First, most participants believe that the crude oil output decrease plans in the OPEC member countries will be extended and support the international crude oil prices significantly. Moreover, due to the crude oil pollution, Russia is likely to reduce its crude oil output in Q3, 2019 as well. Therefore, most participants hold bullish attitudes toward the international crude oil market in Q3, 2019.
Second, the U.S.-Iran tensions keep aggravating, and any assaults on the crude oil vessels or pipelines in the Middle East will raise the international crude oil prices. If the U.S. continues its sanctions on Iran’s crude oil exports, the international crude oil supply will drop significantly.
Third, the U.S. keeps cutting down its crude oil stocks, and the U.S. refined oil stocks drop sharply. Moreover, China and the U.S. have restarted their trading negotiation, and most participants are optimistic about the result of the negotiation. Accordingly, the international crude oil prices in Q3, 2019 will increase. However, participants should be cautious about the risk that the Sino-U.S. trading negotiations break down.
As for China’s refined oil market, it is that the international crude oil prices will increase in Q3, 2019, giving support to China’s refined oil market.
First, many refineries will restart their units in Q3, 2019, and the operating rates at state-owned refineries and independent refineries will increase. Therefore, the supply of refined oil in Q3, 2019 will be ample.
Second, southern China is still in the rainy season in July, and in August, the demand for diesel will revive. From September to October, with the support of agricultural harvest and fishing activities, the demand for diesel will increase significantly. Moreover, the rainy season in southern China will end, and the infrastructural constructions, mining, logistics and transportations will support the diesel demand dramatically. By that time, the diesel market will enter its peak season, and the diesel supply may become short.
In conclusion, China’s refined oil market in Q3, 2019 will be more bullish than that in Q2, 2019. Therein, the prices of diesel will start surging from September, and with the support of the increasing utilization rate of cars’ air conditions, the prices of diesel may rebound from the current relatively low levels.
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