Oil prices stumbled over the past week on the financial market turmoil, stronger dollar, and surging U.S. crude production. But as oversupply fears return with a vengeance to the oil market, the demand for the fuel that helped underpin the oil price rally in the fourth quarter last year and earlier this year is still robust in the world’s key oil consumption region — Asia.
Driven by strong economic growth and industrial activity worldwide, diesel demand accelerated in the second half of 2017, and helped OPEC to a great extent in its mission to draw down excess global inventories.
In the past week, the oil price rally came to an abrupt end as several factors combined to lead to a not-unexpected correction: faster-than-anticipated U.S. production growth, a stronger dollar, chaotic global financial markets, and money managers taking profits as they liquidated part of the record long position in oil they had amassed.
Still, diesel demand in Asia continues to be strong on the back of robust economic and industrial activity growth and ahead of a string of spring maintenance at Asian refineries that is expected to tighten the diesel market in the region and help ease some of the concerns that Chinese fuel exports would flood the market and drive diesel margins down.
According to Bloomberg data, profits in Asia from processing crude oil into diesel jumped last month to their highest level since 2014, as demand surged on China’s winter gas shortage and freezing temperatures in the United States.
Refiners from South Korea to India are optimistic that the strong economic growth and infrastructure and construction spending will support diesel demand this year.
“Growth is seen quite robust this year as well,” Sanjiv Singh, chairman at Indian Oil Corp, told Bloomberg. “We are seeing over 5 percent growth in diesel,” he noted.
India’s demand for diesel increased 8.3 percent annually in December, and is expected to continue to grow at a robust pace this year.
“We are more positive on diesel than gasoline as the former will receive a boost from the government’s measures on infrastructure spending while for gasoline, rising oil prices and growing share of ethanol may cap growth,” Amrita Sen, chief oil analyst at Energy Aspects, told Platts earlier this year, commenting on India’s 2018 oil demand growth forecast.
PIRA Energy Group sees India’s oil demand rising by 300,000 bpd this year, compared with 120,000-bpd growth for 2017.
In January, India’s oil demand rose by 10.3 percent. It’s the fastest pace in 14 months, but this was compared to a low base for January 2017 when oil consumption faltered just after India scrapped high-value bank notes.
In the next few months, Asian demand for diesel is expected to be high and supplies tighter, but analysts warn that once the refinery maintenance season ends, more diesel will end up on the market, and without continuing strong demand, a glut toward the end of the year is likely.
“Thanks to economic growth, refiners are hoping that the region would absorb all diesel barrels, but the region cannot afford any unexpected dip in demand,” Ehsan Ul-Haq, a London-based director of crude oil and refined products at Resource Economist, told Bloomberg.
Asia’s fuel demand is expected to increase by 2 percent this year to 34.5 million bpd, according to Wood Mackenzie senior research analyst Joe Willis. Most of the growth will come from higher gasoline and diesel usage, liquefied petroleum gas (LPG) for cooking and transport, and the petrochemical industry, according to WoodMac. Asian refiners plan to upgrade and install more capacity to meet demand, but any delay in new capacity startups could tighten the fuels market and drive profits up for existing refineries, Willis said.
At least in the next couple of months, the diesel market in Asia is looking good, with healthy demand and planned refinery maintenance restricting some supply.