Asian oil refiners cut output to fight oversupply, low margins

Oil refiners in Asia are processing less crude as they grapple with margins that plunged to five-year lows after the region was flooded with supply of refined products and as slowing economic growth hits demand for fuels.

Asian refiners typically increase utilisation rates from July after carrying out regular maintenance in the second quarter, building stocks of fuels such as diesel and gasoline to meet demand that peaks in summer.

But this year, several Asian refiners are maintaining or reducing crude throughput in July and August after refineries around the region in the first quarter binged on the cheapest crude in over a decade, swamping Asia with excess fuel, industry sources and analysts said.

"Falling refining margins are prompting refiners to consider economical run cuts," said Sri Paravaikkarasu, a senior consultant at energy analysts FGE.

"This will help to clear some surplus in the second half of 2016," the consultant added.

A near doubling in oil prices from January has also pressured margins, or the amount of profit a refinery makes on processing crude.

Less demand for crude from Asian refineries in combination with factors such as a gradual recovery in US shale production could drag on any continued recovery in benchmark oil prices.

"The... ripple effect into crude demand is not helpful for oil balances and prices," Morgan Stanley analysts said in a note on Monday.

Singapore Refining Company, a joint-venture between PetroChina and Chevron Corp, is expected to operate at about 80% of capacity from June to August, down from close to 90% in May, said sources with knowledge of the matter.

South Korea's largest refiner SK Energy is also cutting crude throughput in July and August, while run rates at South Korea's No 2 refiner GS Caltex were 10 percentage points lower in the second quarter than the first three months this year, sources said. The companies declined to comment.

GS Caltex's July run rates are unchanged from the second quarter, the sources added.

Meanwhile, Hyundai Oilbank and Taiwan's Formosa Petrochemical Corp are trimming output in July due to maintenance.

However, two consecutive quarters of lower refinery runs may point to a rebound in Asian demand for crude towards year-end, with appetite for jet fuel, also used for heating, typically peaking in winter.

"Fuel inventories and crude prices are starting to come off in third quarter and we're going into maintenance season again," said a trader with a North Asian refinery. "Q4 will be better than Q3," the trader added.