SPC

Published January 11, 2007

Weak but better refinery margins seen in Q1

Exports from new Indian refineries may continue to hit S'pore industry

By RONNIE LIM

SINGAPORE refining margins look set to trend sideways in the first quarter of 2007 with the Chinese New Year lull but should be better than in Q4 2006, says Merrill Lynch analyst Adrian Loh. Exports by new Indian refineries will also continue to depress margins here, says Tony Regan, a consultant with US-headquartered Nexant.

'Q4 demand last year was extremely weak, mainly due to the festive season, with regional stockpiles also remaining high,' Mr Loh told BT. 'The Northern Hemisphere winter has also been warmer or is quite late in coming.

'The market is in a lull at the moment. Q1 is usually also affected by the Chinese New Year break, which puts a dampener on trading. There may be a pick-up in Chinese buying in the lead-up to the holidays, although the Chinese refiners have also been producing and have enough stocks.'

The year 2006 was a see-saw year for refiners here, starting with a weak couple of months. Demand came back in March, which boosted the average Q1 margin to about US$4 a barrel. Q2 demand was strong, resulting in a doubling in margins.

In Q3, margins were again eroded by oversupply and weak regional product demand, and refiners here, like those in South Korea and Japan , cut their crude runs. Additionally, a slide in crude prices after August's record US$78.40 a barrel forced refiners to make provisions for write-downs in inventory to reflect a subsequent fall of US$20 a barrel during the quarter.

Listed Singapore Petroleum Company (SPC) - somewhat reflecting the industry picture - consequently reported a halving in Q3 margins to US$4 a barrel from Q2's US$8.

SPC, with equal partner Caltex, owns half of the 285,000 barrels per day (bpd) Singapore Refining Company plant. The other two refineries here are ExxonMobil with 605,000 bpd and Shell with 500,000 bpd.

Going by industry indications, the picture in Q4 was no better. The continued slide in crude prices should result in prudent provisioning for the final 2006 quarter, an observer said.

Yesterday, oil prices continued to fall - dropping more than US$2 at one stage to US$53.88, before clawing back to around US$55 - due to the mild northern winter and investment funds pulling out.

Nexant's Mr Regan said exports from new Indian refineries began to affect the Singapore industry from the second half of 2006.

'The Indian exports had an impact on product prices, especially on naphtha, in Asia, and damaged Singapore margins last year,' he said.

'Q1 will continue to see excess production sold from India , with this depressing Singapore margins. Reliance is doubling the size of its refinery, with this new capacity coming on stream in a couple of years.

'The question now is how much more new capacity the Indians will build, although there are signs of the refining construction programme there slowing down.'

New Chinese refining capacity, on the other hand, should not affect Singapore because it will go more towards meeting growing domestic oil demand, Mr Regan said.

He said that in the short term 'people are nervous about the next few months, especially with the mild winter so far. Demand will continue to be weak unless there is a real cold snap in the United States or Europe '.

Regan, a consultant with US-headquartered Nexant.