As economic activity in China dials back, Moody's said it expects its refined product demand growth will moderate to 2.5 -3 per cent in 2017-18, compared with compounded annual growth rate of 5 per cent in 2012-16.
"Nonetheless, in absolute terms, the EIA says China will account for 48% of Asias R&M sectors demand growth in 2018. In comparison, India will surpass China as the fastest-growing product market in Asia with petroleum consumption growing 6 per cent in 2018," it said.
"Driven by China's and India's appetite for petroleum products and continued capacity rationalisation, we believe refining margins will remain firm, thereby supporting the growth in earnings," says Rachel Chua, a Moody's Assistant Vice President and Analyst.
It expected the average Asian refining margins to be largely in line with the average of USD 6.2 per barrel for the last three years, but better than USD 5.1 per barrel in 2016.
"The recent forced closure of about a quarter of US refining capacity has created an undersupply situation, causing fuel prices -- including gasoline, diesel and jet fuel -- to surge. Nonetheless, we expect the recent spike in crack spreads and refining margins to temper and normalise as the supply crunch eases gradually," Chua said.
In its report, "Refining and marketing -- Asia, Outlook stable on modest EBITDA growth and firm refining margins", Moody's said it expects the fundamental business conditions in the sector to continue over the next 12-18 months and have been stable since October 2014, when Moody's initiated its outlook opinion.
Supply and demand will vary by country, but for the region as a whole, Moody's estimates that Asia's incremental growth in demand for fuel of around 0.7 million barrels per day (bpd) will outpace net refining capacity additions of 0.4 -0.5 million bpd over the next 12-18 months.
At the same time, the bulk of the incremental growth in refining capacity will come from China and Vietnam.
"Still, with demand growth surpassing capacity additions over the last five years, Asia is likely to remain a net importer of refined petroleum products over at least the next three years," it said.
Asian refiners, it said, continue to be exposed to the economic slowdown in China, industry cyclicality and geopolitical risks, despite our stable outlook.
"We could change our outlook to negative if net refining capacity additions and increasing refinery output in Asia materially outpace growth in demand, such that our projected EBITDA for the industry declines by more than 10 per cent; or if demand from China and India contracts; or if geopolitical developments materially alter operating conditions," it said.
Moody's said it would consider a positive outlook if regional demand overwhelms capacity additions such that refining margins exceed USD 8 per barrel on a sustained basis, leading to raising the EBITDA-growth forecast above 10 per cent.