Asian gasoil markets will continue to face headwinds over the next few months even as refineries cut processing rates further and economies gradually start picking up as the coronavirus pandemic becomes contained, analysts said.
Sluggish industrial activity and travel restrictions due to extended lockdowns, alongside disruptions to global supply chains, could cut gasoil demand by more than 4 million barrels per day in the second quarter from the same period in 2019, depressing refiners' margins, they said.
Refining margins, also known as cracks, for gasoil with a sulphur content of 10 parts per million (ppm) slid to a record low of $2.83 a barrel over Dubai crude this week.
The gasoil crack, which until last month showed resilience when the downward spiral engulfed jet fuel and gasoline, is currently one of two oil products that yield positive margins in the refining complex.
However, it has shed over 67 percent in the last one month, prompting refiners and traders to worry that the worst might be yet to come. Gasoil and jet fuel, or middle distillates, account for about 40 percent of refiners' output.
"Weakening cracks, plus worries over the availability of off-takers, is prompting more Asian refineries to consider additional run cuts," said Sri Paravaikkarasu, director for Asia oil at consultancy FGE.
"Even with this, Asian gasoil length should be some 900,000 barrels per day (bpd) higher y-o-y over May. Consequently, Singapore 10-ppm gasoil cracks should face more headwinds in the near term, before stabilizing in late-June/July."
An ongoing shift in refinery yields away from the beleaguered products such as jet fuel and gasoline partially offsets the reduction in gasoil output from ongoing refinery run cuts, analysts said.
Rystad Energy expects COVID-19 to remove nearly 4 million bpd of road diesel demand worldwide in the second quarter, and diesel demand in other sectors to drop by another 1.2 million bpd.
Subdued demand in major domestic markets including India and China would likely force these countries to export more fuel into the region, which is already grappling with supplies, trade sources said.
"The lockdown in India is expected to negatively impact diesel cracks in the region as the drop in domestic consumption will free more diesel for exports," said Rystad senior oil market analyst Paola Rodriguez-Masiu.
"The progressive recovery of China will offer some support to diesel cracks, but weakness is expected to persist until the end of third quarter 2020."Follow our full coverage of the coronavirus pandemic here.