In addition to capacity reductions and unscheduled outages, there have been a series of “other” factors that have recently supported Singapore complex refining margins according to Macquarie. These include: Indian diesel consumption Indian demand for subsidized diesel was up 14% YoY in June. Jal Irani, Macqarie's Indian oil analyst, noted on Aug 1 that demand is being driven by: power shortages; diesel pump usage for irrigation following a  drought, industrial switching and passenger car demand. As a major diesel consumer (4th largest globally) and a major regional exporter, Indian demand for diesel has offered support for regional middle distillate crack spreads. So while diesel demand is increasing, that level of growth would have likely been lower if not for a drought, power outages and with support from subsidies.
Iranian crude oil sanctions via Europe
Iranian crude oil sanctions via Europe Argus reports that in May the shortfall of Iranian crude for European refiners has reached c.800k b/d, up from Macqarie's estimate of 310k b/d in April. An absence of medium sMacqarie's crude has hurt operating rates at Mediterranean refiners as can be seen by major reductions to utilizations (below). This crude grade mis-match has tightened margins for the Atlantic Basin and indirectly supports global margins via arbitrage flows. For Asia, Iranian crude imports have been reduced but not completely removed. There have also been some reports of reductions in Iranian fuel oil imports from Singapore tied to sanctions but they have been at relatively low levels.
Crude oil differentials, but supply-driven
The June spike in Singapore complex refining margins happened in conjunction with a sharp improvement to light-heavy crude oil differentials. Historically, wide spreads between light-heavy (API gravity) and/or sweet-sour (sulfur) crude have been an indication of strong refining fundamentals. However, current spread strength appears to be related to supply issues. First there were a series of Asian outages that unexpectedly limited refining utilization rates. At the same time and also supply-related, relatively heavy OPEC crude output surged starting in 1H12. That supply depressed the price of heavy OPEC grade crudes. Forward curve says declining differentials
In line with recent comments from Macqarie's global oil economist, the spread between lighter and heavier crudes should moderate in 2H12. This matches the futures curve which has the current Brent-Dubai premium falling by US$1.5/bbl into November. This would put spreads back in line with historical averages. This supports Macqarie's view that Asian refining margins will moderate as we move towards year end.
Global inventory levels have also been tight
Global inventory levels have also been tight. Macqarie track five different measures of global inventories. A consistent theme for refined product (not crude) is very low or near multiyear- low inventory levels. Unfortunately, the recent drawdown does not yet coincide with any broader trends related to a major recovery in demand growth.
Rather, low inventory levels appear to reflect either decisions to cut back operating rates (as seen in China) or are the direct result of the above mentioned capacity outages. Overall, and against continued weakness in demand, low inventory levels on their own are not the single-largest threat to refining margins. That is not to say that there are not risks. A revitalized U.S. refining system is currently running at operating rates it has not enjoyed since 2006.
Extended periods of high utilization increase the possibility of future unplanned outages. U.S. operating rates and inventory levels are also worth noting as we move into through US Atlantic hurricane season (July-November).
Supply response expected
The eventual return of offline/idled capacity will eventually support improvements to relatively thin inventory levels. Additionally, one-off events such as droughts and Iranian sanctions will either expire or be worked around.
Source: Macquarie