Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

If your heart missed a beat when West Texas Intermediate crude dipped below $30 a barrel for the first time since 2003 earlier today, spare a thought for oil producers in Asia: The Oman/Dubai benchmark used for regional contracts has been languishing below that level for four days now, and was set at $26.91 on Tuesday night.

Is this bad news for Asia's oil companies? Quite the opposite.

As a region, Asia is short of crude. Japan, China, South Korea and India are are four of the five biggest net importers of oil and petroleum products, according to a ranking by the U.S. Energy Information Administration, and even Singapore imports a greater volume than Italy .

That matters because ``oil companies" often have sharply divergent interests. Falling prices are bad news for the upstream companies that produce crude, but can be a boon for the refiners that turn it into gasoline, fuel oil and kerosene for sale to the public.

Merrily Down the Stream
The refining & marketing sub-index of the S&P-500 outperformed explorers & producers as the oil price fell
Source: Bloomberg data
Note: Jan. 12, 2015 = 100

Look beyond the integrated oil behemoths such as Exxon Mobil, Shell and Total, which have a foot in both camps, and the sector in many countries is dominated by upstream businesses. It's different in Asia, where refiners and marketers have an aggregate market value well above that of the region's exploration and production companies:

Big in Japan
Market capitalization of listed oil companies, by region
Source: Bloomberg data

Asia-based companies account for about 26 percent of the global equity value of publicly traded E&P firms; for refiners and marketers, the comparable figure is about 46 percent.

The region is less responsive to the falling crude price than many other regions of the world, thanks to fuel subsidies that amounted to some $85 billion in 2013, according to the International Energy Agency. While pump prices of gasoline, fuel oil and LPG will eventually be re-set by governments in response to the drop in oil, in the meantime refiners are enjoying fixed selling prices and sharply falling costs. That's helping to push up margins: The 3:2:1 crack spread for Asian refiners hit a six-month high of $18.13 on Tuesday, according to data compiled by Bloomberg, almost double the $9.49 available in the U.S.

Cracking Up
Refiners' margins are outperforming in Asia
Source: Bloomberg data
Note: Shows 3:2:1 crack spreads for WTI Cushing/Gulf Coast, Dubai/Singapore, Brent/Northwest Europe

This situation won't last forever. Besides the prospect of government fuel-price cuts, those exploration and production companies can also respond, and choose to divert cargoes to regions where they'll fetch a higher price. Saudi Aramco last week narrowed the discount for its Arab Light crude in Asia more than the market expected, leaning against the decline in benchmark prices.

There's also the issue of competition. China's teapot refiners, privately owned plants which were barred from importing crude until last year, will account for about 15 percent of the country's inbound shipments this year, Bloomberg News reported today, providing a challenge to state-owned companies.

Still, there are opportunities out there. Asian refiners and marketers are valued at about 9.3 times forecast earnings over the next 12 months, according to data compiled by Bloomberg, well below the 9.8 multiple for the global industry. Indian Oil, Thailand's Bangchak, and Idemitsu Kosan, the Japanese refiner that's merging with Showa Shell, are all trading on multiples of less than nine.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The ranking is from 2012 so looks a little out of date now, but if anything that probably understates Asia's net import position. The U.S., the top net importer in the IEA's ranking, is now forecast to become a net energy exporter after lifting a 40-year ban on exports of crude.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net