If Asia was facing demand concerns, then why would Iran need to hike prices by 35 cents per barrel?
Reuters reports that Iran lowered prices to Europe again but increased prices for Asia. This continues to highlight that the demand in Asia is much higher than what we had all expected. There's a generation of drivers in Asia that have never seen gasoline prices this low. This has likely spurred additional gasoline demand and pushed auto sales to new highs in both India and China.
What's also interesting to note is that oil usage per consumer remains significantly below the developed world. Car penetration in China remains low despite auto sales at all-time highs. This implies further room for demand growth in China as higher auto sales eventually translate into higher gasoline demand.
Because of the increase in demand, the Chinese government has allowed Teapot refineries to import crude oil. This has spurred a massive refined product glut that has swept much of Asia. If Teapot refineries continue, this will likely keep gasoline prices low, which could further increase demand.
In a normal market environment, if oil prices rise, the spread to produce gasoline (3-2-1 crack spread) or the refining margin increases depending on the end market. If for some reason, there's a glut of gasoline inventory, refining margins would decrease and spur refineries to lower crude throughput. But because of this new dynamic with Teapot refineries, we think even if oil prices rise, gasoline prices in Asia will remain low because of this new glut of refineries. This would continue to be bullish for oil prices.
We don't expect demand to weaken at all in Asia. Auto sales remain robust, and a gasoline glut will help induce more demand.
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