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Winter Is Coming For Oil Refiners

Tsvetana Paraskova

The U.S. sanctions on Chinese tanker firms and the increased tensions in Middle Eastern waters have spoiled what many refiners had anticipated could be a bumper Q4 quarter just ahead of the new rules on cleaner shipping fuel taking effect in January 2020.

The global shipping industry has seen freight rates soar over the past few weeks as traders and shippers stay away from booking oil tankers owned by Chinese tanker companies that came under U.S. sanctions for dealing with oil from Iran. The cost of chartering supertankers to carry crude oil from the Middle East to Asia has soared and made oil procurement costs so high to the point of eroding refining profits for refiners.

Complex refining margins in Singapore plunged to just US$2.91 per barrel at the end of last week, from a high of over US$10 a barrel in mid-September, Bloomberg reports, citing data from Oil Analytics. The current refining margins in Asia are close to the lowest levels for this time of the year in five years.

Therefore, refiners are now faced with a choice - whether to reduce refinery rates of fuels just ahead of the winter season or whether to continue with their usual crude oil import plans, paying a much higher price to get the oil shipped and operating at low or no refining profit, Bloomberg notes.

“Overall, refinery margins aren’t terrible when considered against oil benchmarks such as Dubai or Brent, but I can see why some refiners may consider run cuts once you add physical oil premiums and freight costs,” Nevyn Nah, an oil analyst with Energy Aspects, told Bloomberg.

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Sinopec, the largest oil refiner in Asia and in China, for example, is said to be considering cutting refinery run rates as of November as soaring freight rates have severely cut refining margins.

According to shipping and trade sources who spoke to Reuters, the higher shipping costs and the premium after the attacks on Saudi oil in mid-September have led to an increase of US$3 a barrel in the oil cargoes set to begin travel from the Middle East to China in November.

By Tsvetana Paraskova for Oilprice.com

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