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Asian gasoil margins at lowest since mid-2017, new fuel rules yet to bite

By Koustav Samanta

SINGAPORE (Reuters) - Steady supply and a lack of buying interest have pushed Asian refining margins for gasoil to their lowest in more than 2-1/2 years, and an expected demand boost following a switch to cleaner marine fuels this year has yet to materialize.

Gasoil profits have dropped by 27% since the International Maritime Organization (IMO) banned ships from using fuels with sulphur content above 0.5% from Jan. 1, but traders predict demand from ship-owners will increase over the next couple of months, albeit at a slower rate than expected earlier.

While some are expected to switch to marine gasoil (MGO) to comply with the new IMO rules, other operators have so far preferred very low sulphur fuel oil (VLSFO) over MGO as VLSFO has better calorific properties and other technical advantages.

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Refining profit margins, also known as cracks, for gasoil with a sulphur content of 10 parts per million (ppm) plunged to as low as $11.70 a barrel over Dubai crude on Wednesday, their lowest in absolute terms since June 2017.

On a seasonal basis, cracks are their weakest since 2016, Refinitiv data showed, while cash premiums for the grade have fallen about 77% so far in 2020.

Graphic: Asia gasoil refining margins slump to lowest in over 2-1/2 years amid muted demand https://fingfx.thomsonreuters.com/gfx/ce/7/8220/8201/GasoilMargins.png

Low demand has eroded distillate margins across the globe, prompting speculation that some refiners could start reducing processing rates.

The gasoil market, however, is expected to see an increase from IMO 2020 over the next couple of months, but the increment is expected to be less than 1 million barrels per day (bpd), traders and analysts said. This compares with an earlier forecast range of 1.4-2 million bpd around September.

"We've definitely pared back our expectations over recent months," Emma Richards, senior oil & gas analyst at Fitch Solutions said.

"The next couple of months will tell – stockpiles of VLSFO in Singapore will be run down and it's reasonable to assume the sustained premium over MGO will ultimately tip demand, particularly if it widens further, as supply becomes more constrained."

VLSFO prices have risen past those of cleaner and typically costlier gasoil in recent weeks, but market participants believe this will not last.

"MGO demand will go up as ships will choose to make modifications particularly for longer distances... We expect the fuel switch is likely to start in late January or early February, said Rui Hou, analyst at Wood Mackenzie.

(Reporting by Koustav Samanta; Editing by Florence Tan and Barbara Lewis)