The crisis created by the Iran conflict in the supply of refined fuels in Asia continued in August, with the top-consuming region's imports dropping to the lowest point since the war started.
Asia's imports of light and middle distillates are estimated at 5.10 million barrels per day (bpd) in August, falling from 5.61 million bpd in July, according to data compiled by Kpler, a commodities analyst.
Imports are down about two million bpd from the average of 7.06 million bpd in the three months leading up to February 28, when the US and Israel launched aerial strikes against Iran.
Since the start of the conflict much of the market focus has been on the supply of crude, given the massive drop in shipments through the Strait of Hormuz, the narrow waterway through which nearly 20 per cent of global oil supplies moved prior to the hostilities.
Tanker movements through the strait remained constrained, though there is debate about how much oil is getting through, with claims by the US Energy Secretary of up to nine million bpd being disputed by several vessel-tracking services, which see less than half that amount.
But the debate over crude volumes leaving the Middle East is not the argument the oil market should be pursuing, at least not in the immediate term.
Asia, the destination for about 90 per cent of Middle East crude, has adjusted to lower oil supplies, mainly with top buyer China slashing its imports by nearly four million bpd and also by drawing down on inventories.
But the real pressure is in the market for refined products, particularly for middle distillates like diesel and jet fuel. The product market is having to deal with the loss of cargoes from the Middle East and also from Russia, which has curtailed fuel shipments after Ukraine successfully struck several of its refineries.
The constrained supplies of refined fuels are showing up in prices, with Singapore gasoil ending at $155.15 a barrel on Monday, up 70 per cent from where it was - $91.42 - on February 27, the day before the Iran war started. The profit margin for a typical Singapore refinery to produce a barrel of gasoil ended at $67.93 on Monday, three times more than the $21.90 that prevailed on February 27.
Gasoline shows a similar dynamic, with the profit for making a barrel of the light motor fuel ending last week at $27.47, more than three times the $8.00 from the day before the conflict started.
The wide margins for producing light and middle distillates do raise some questions about the market's dynamics.
The main question is why are Persian Gulf producers running risks in shipping crude through both the Strait of Hormuz and the Bab el-Mandeb waterway when they could make vastly more money moving refined products?
Exports of light and middle distillates from the Middle East are estimated by Kpler at 2.14 million bpd in August, down from 2.58 million bpd in July.
They are also 55 per cent below the 4.49 million bpd average for the three months to the end of February.
In effect, Asia's imports of light and middle distillates are down by about two million bpd, reflecting almost exactly the loss of supply from the Middle East.
The initial phases of the Iran war did see Tehran attack refining sites across the gulf, but much of the damage has been repaired, although some capacity remains offline. But it is likely that Saudi Arabia and the United Arab Emirates have the refining capacity available to produce fuels that are needed in Asia.
The problem may lie in the lack of available vessels to transport products and the difficulty in doing ship-to-ship transfers, assuming you can get the fuel out of the Strait of Hormuz without being attacked by Iranian missiles or drones.
But the one thing that the Iran conflict has reinforced is that the oil market is remarkably adept at adapting to challenging circumstances. If Middle East producers can pivot to exporting more fuels, that would go some way to alleviating the stress in refined products markets and the risk of serious economic damage from high prices and constrained supply.
(Reporting by Clyde Russell; Editing by Thomas Derpinghaus)
