Fuel demand uncertainty weighs on refiners’ margin

Domestic and international travel bans have reduced demand as self-quarantine measures are expected to persist for a little longer


OIL refiners looking to take advantage of the lower crude oil prices to increase their crude reserves should err on the side of caution as recovery in fuel demand will remain tepid for some time to come, said analysts.

Restrictions imposed on domestic and international travel have reduced demand as consumers obey self-quarantine measures, which are expected to persist for a little longer.

“Even with the recent recovery in oil price, we opine that it is still premature to say we are out or heading out of the oil price crisis.

It will also be challenging for local refiners to manage their inventories going forward as the Movement Control Order (MCO) and Conditional MCO (CMCO) have had an impact on demand for oil-related products going forward,” MIDF Research analyst Noor Athila Mohd Razali told The Malaysian Reserve.

The interstate travel bans for the annual Hari Raya Aidilfitri exodus “Balik Kampung”, had further upset the demand for petrol.

The lower demand is expected to translate into tighter margins for oil refiners like Petron Malaysia Refining & Marketing Bhd and Hengyuan Refining Co Bhd whose shares have eased sharply in the past two months due to the record plunge in crude oil price.

Noor Athila said Petronas Dagangan Bhd has seen a blended 4% drop in sales volume year-on-year in the first quarter ended March 31, 2020 (1QFY20), with only two weeks of MCO implemented during the quarter.

She said this serves as an indication on how demand will be like in the coming months due to both the MCO and CMCO.

“The challenge for the local refiners is to manage inventories and estimate demand in the current situation as oil price remains volatile. It is safe to expect profits to be impacted and margins will remain compressed for the time being,” she said.

Latest quarterly financial filings saw Petron post a net loss of RM83.7 million for its 1QFY20 due to a 11% fall in fuel sales domestically in the MCO period.

Petron shares fell to a low of RM2.50 on March 19 following the imposition of the MCO on March 18, before rebounding to close at RM4.10 last Friday.

Its peer, Hengyuan, made a net profit of RM21.6 million for the 4Q ended Dec 31, 2019. Hengyuan shares closed at RM3.49 last week, retracing from its low of RM2.29 on March 23, 2020.

AxiCorp Financial Services Pte Ltd global chief market strategist Stephen Innes said the refinery sectors have to brace for difficult times given the demand for fuel will remain low until there is clarity on total lift on travel restrictions.

“If we can extrapolate data from both the US and China markets where driving patterns are returning to normal, refinery run rates remain depressed as most of the refineries have a glut of oil.

“This should gradually correct over summer months, but over the near term the refinery outlook remains challenging,” he said.

The Brent crude oil futures contract closed the trading week at US$37.73 (RM164.13) a barrel, while the West Texas Intermediate futures contract was priced at US$35.34 a barrel.

Reuters recently reported oil refineries have curbed output since February as travel restrictions destroyed fuel demand.

Most refiners are operating, but numerous companies have reduced the number of barrels of oil they process as petrol and diesel use predetermined contracts.

Fuel demand has dropped by about 30% worldwide as the Covid-19 choked economic activities and forced billions of people to stay home to curb its spread, creating a global supply glut.