Next oil downturn? Looming gasoline glut threatens crude's rebound

Mon Apr 25, 2016 6:29am EDT
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By Henning Gloystein and Florence Tan

SINGAPORE (Reuters) - A rebound in oil prices this year from 12-year lows is in danger of coming to a crashing halt, as the main engine of global demand growth for the past several years starts to sputter amid signs of a gasoline glut.

Crude oil LCOc1 has rallied more two-thirds from its mid-January nadir on robust demand from refineries worldwide, stoking cautious optimism among producers and exporters that the epic rout that slashed global prices by 75 percent between mid-2014 and early 2016 is finally over.

But rampant production of oil products, especially in Asia, is threatening to derail that recovery. Several major gasoline importing countries have started to export, as excess supplies of fuels overflow storage facilities and erode refinery profits.

"Asia has overcapacity in refining, so that's ruining margins," said Oystein Berentsen, managing director for crude at oil trading firm Strong Petroleum in Singapore.

"Japan is exporting and product stocks are still building. In China, new refiners are exporting as much as they can, so they're flooding the market. At some stage, the refining overcapacity will have an effect on crude."

Soaring output has left the world awash with cheap crude as supply exceeds demand by 1 million to 2 million barrels per day.

That should be good news for refiners, but "crack spreads" - the difference between the cost of crude and its refined derivatives often used to estimate refining margins - on most oil products have slumped in Asia lately as output exceeds demand, causing inventories to swell.

Even gasoline margins - the biggest source of profits for most refiners over the past year - are down nearly 40 percent since March as storage hubs such as Singapore, where inventories STKLD-SIN are near historic highs of 15 million barrels, struggle to cope with the glut.   Continued...

Pedestrians walk past a gas station in Tokyo February 1, 2011.   REUTERS/Kim Kyung-Hoon/File Photo