Asia has emerged as one of the most, if not the most, significant growth markets in the world for petroleum products. And its influence on supply and demand economics, price formation and trade flows globally is only set to increase.
However despite this trend, it’s important to keep in mind how this growing market for petroleum products in Asia could usher in a wave of new complexities and uncertainties for market participants. The Argus East of Suez (EOS) Products Conference in Singapore, which I attended with my colleague Yi-Jeng Huang last week, gave me much food for thought on this subject.
On arrival at the EOS conference, which was attended by about 80 industry participants, I was immediately impressed at the number of attendees representing Middle Eastern firms (including Saudi Aramco, KPC, and DME amongst others) and Indian firms (Indian Oil amongst others).
Speakers during the conference concentrated on the changing oil products markets, focusing mainly on the Asian, Australian and Middle-Eastern region. Their general overview of the market is one I think most of us working in the region are relatively familiar with:
- There is declining oil demand growth in the industrialized countries and a shift towards non-OECD countries (whose oil demand now exceeds that of OECD countries);
- We are currently seeing an increase to supply globally. Most of the new refining capacity in the next five years will be coming from emerging economies. This will lead to a slow build-up of supply and lower prices; and
- We can now expect new trade flows (away from the U.S. and towards or within Asia), and a shift in the product mix (driven by the massive demand for transport fuel in Asia).
Commentators are now almost all invariably stressing what I mentioned above, the “growing complexities”, “new uncertainties” and “volatility” that exist in this market (all of which underscore the need for granular, validated and refined data analysis).
Here is my breakdown of each and how they were discussed at the conference:
1- Growing Complexities:
- The demand shift to Asia and other emerging economies has possible technical implications such as new seasonality patterns and new possible links between data quality and price volatility;
- One should not underestimate the constant investments required to exploit shale gas (as opposed to conventional drilling, say in the North Sea, where after the initial investment is made the marginal cost is relatively low). In other words, the productivity and profitability of a shale gas site can decrease rapidly. There was a debate about what the market price needs to be in order to support shale oil investments (there was varying views at the conference )
2- New Uncertainties:
- Macro-economic: the extent of demand shift toward non-OECD might not always be as strong as we think. China is currently experiencing a severe credit crunch causing, amongst other things, a slowdown in some refinery constructions projects. This comes with statements from the Chinese government that suggest economic growth is not the only consideration and that GDP numbers in the future could be more modest than expected. Conversely, a panelist at the conference stressed that the contraction of demand in the OECD could be more temporary than expected.
- The reliability of production and supply forecasts are hard to gauge as there is huge variations between countries and organizations. For example, we know that Russia is poised to increase its market share of the European diesel market owing to a wave of refinery modernization and a more favorable export duty regime. However it may also compete in the Asian market depending on whether or not the government goes ahead with a number of new refinery projects in the Far East.
- One participant at the conference stressed the high sensitivity of oil prices to the ViX index (a CBOE measure of market expectation of near term volatility is reflected in the Standard & Poor 500 index option prices) and the Purchasers Manufacturing Index (another common, forward looking indicator of confidence).
Faced with so many nuances in what otherwise are clear broad trends, market participants will need to have quick and easy access to the right data when they need it.
Here at ZE PowerGroup Inc we have created the ZEMA Suite – an intelligent suite of products used for data aggregation that adapts with different formats, timings, frequencies, standards, and units of inputs. Just this week we announced our expansion to our services in Singapore, where we believe market participants will now be seeking out the right kind of data management solution to help them deal the growing complexities of this market and other commodity markets.