singapore • Refineries in Asia face falling petrol prices and growing losses in producing the fuel, as the prospect of a sustained global supply glut looms over the industry in the next few years.

After more than five years of robust profits, the value of petrol against benchmark Brent crude has slid into discounts last month, and more losses are expected due to additional output capacity in Asia and the Middle East as US demand falls.

“We are just seeing the tip of the iceberg in terms of the whole petrol situation,” said Vijay Mukherji, head of Middle East and South Asia research at FACTS Global Energy in Singapore. Asia would see an excess of about 500,000 barrels per day (b/d) of petrol in 2010 against 80,000 b/d last year, data from the consulting firm showed.

Petrol production capacity in this region will jump nearly 20 percent to 5.2 million bpd in 2010, compared to last year. During the period demand will rise 10 percent to 4.7m b/d. Globally, some 7.354m b/d of secondary unit capacity-producing higher-value products such as petrol, diesel, jet fuel and naphtha — will come online from this year until 2013, the International Energy Agency (IEA) said.

The oversupply and shrinking margins have forced refiners worldwide to reduce output, the latest being in Asia, with some plants in Singapore, South Korea and Thailand trimming crude runs.

Older plants in Europe and Japan could shut for good, if they fail to vie against sophisticated facilities in the Middle East and India, where Reliance Industries’ new 580,000 b/d refinery will produce 8-10 million tonnes of petrol a year from early 2009.

Japan and Europe might each see some 0.5m b/d of capacity shut in coming years, Mukherji said. Petrol margins measured against Brent crude — known in the industry as crack spreads — were around minus $0.50-$1 in the past week, and have sunk to as low as minus $4 a barrel in the last one month. This is in stark contrast to premiums of more than $10 seen two months ago. “I expect overall margins to come down in the next couple of years and that’s really the result of the supply capacity coming on,” said Victor Shum, analyst at Purvin and Gertz in Singapore.

“Not just grassroots but also conversion projects that will increase supplies of light products.” The petrol crack spread could have fallen further if not for resilient demand in Indonesia and Vietnam, Asia’s top petrol importers, traders said. But even Vietnam’s petrol imports could be reduced, with the planned start-up of its first 140,000-b/d refinery in Dung Quat next February and the 200,000-b/d Nghi Son plant by 2013.

OUTPACING DEMAND

Higher global production is exacerbated by declining petrol imports into the United States, where demand was hit by recent surges in prices and a weakening economy, dampening shipments from Europe, which supplied 500,000-600,000 b/d last year.

Petrol exports to the world’s number one consumer last year from South Korea, Singapore and Japan of 24,000-27,000 b/d (1.04-1.17m), have slowed to a trickle this year. Exports only picked up recently as the summer driving season comes to an end, with shipments of up to 90,000 tonnes to the US West Coast.

“I see US petrol demand getting even weaker,” said Jim Ritterbusch, president of US-based Ritterbusch & Associates, who sees a 3 percent fall in on-year demand.

“We have seen some price decline at the retail level lately, however I don’t think it’s going to be enough to reverse the conservation trend we have seen this year.”

The lower consumption will be worsened by increased ethanol blending, set to bring US petrol deficit to 772,000 b/d in 2010, down almost a third versus 2007, Purvin & Gertz data show. “US petrol demand growth will significantly affect the decision making among Asian refiners as that’s the natural home for exports. They will have to very closely watch what is happening to the ethanol situation,” Mukherji said.

PRODUCTION CUTS

But the Middle East, especially Iran and Saudi Arabia, needs to plug its petrol deficit, at 130,000-140,000 b/d in 2007, offering short-term relief to sellers, Mukherji said.

However, the shortfall will shrink to 30,000-40,000 b/d in two years and the Middle East will have a surplus of 200,000 b/d by 2012-2013, he added. China, which became a net petrol importer for the first time in May, is unlikely to remain a sales outlet, given its string of new refineries and upgrade plans, unless the projects are delayed by shortages of raw materials such as steel.

“If China’s petrol demand continues unabated and the refinery projects get delayed, then the imports by China will increase,” said Purvin & Gertz’s Shum. Producers must bite the bullet to rescue prices. “We have suppliers looking for markets and having a hard time finding them. What that means is that refiners will have to cut back on operating rates to reduce supplies,” said Shum.

Before the cuts in Asia, US refiners have reduced crude runs to 87-88 percent from the usual 93 percent this time of year, Ritterbusch said. “Refineries will feel the pressure between 2011 and 2013, and we may see a series of consolidation activities and possibly closures happening in Japan, Europe, in some other parts of Asia and even the United States,” Mukherji said.