Diesel fuel, expected to be a key oil-market driver this year, has proved one of the weakest links in Asia this summer as higher prices hit demand harder than for other products, analysts and traders said on August 25.
Rising domestic prices in Thailand and Vietnam have soured demand for the fuel, while improved power supply and restricted retail prices in China have curbed the need for imports.
A rash of rare exports, first from China and recently from Thailand, has piled pressure on a regional market now seeking buyers in Europe and the United States, where prices are much stronger. Singapore physical diesel cargo prices have plunged this month to their deepest discounts ever.
A global shortage of middle-distillate fuels - comprising diesel, jet fuel and gas oil - helped drive prices over $50 last year and was expected to keep up the pressure this year as refiners struggle to meet demand from European motorists, US truckers and Chinese businesses.
However, unlike demand for gasoline or jet fuel, driven by middle or upper-class car owners and international travellers, diesel is used heavily in Asian agriculture and fishing, sectors proving more sensitive to this year's 50 percent surge in prices.
"The high price of oil is making it difficult for operators of small commercial vehicles, like fishing boats, to make a profit," said analysts FACTS Inc.
This is most apparent in Thailand, where demand growth will contract in the second half of 2005 after fuel subsidies ended last month, coming after a near double-digit demand jump in the first half, its energy ministry said this week.
"The use of alternative fuels is also being encouraged, including biodiesel and ethanol," FACTS Inc said.
After scrambling for diesel imports to cover refinery shutdowns earlier this year, Thai refiners have since reversed course, dumping surplus gas oil in the Asian spot market.
Thailand's Alliance Refining Co (ARC) has sold over 700,000 barrels of diesel since July, helping push the discount for prompt Singapore cargoes to a steep $3 a barrel.
"The increased costs of oil combined with the government stopping subsidies have hit the Thai consumer - thus demand for diesel has been weaker than expected," said oil analyst Adrian Loh from Merrill Lynch in Singapore.
Neighbouring Vietnam, which has raised state-regulated domestic diesel prices 52 percent since the start of the year, has contracted at least a million tonnes of diesel imports in the third quarter - unchanged from last year - despite expected average annual growth of 10 percent.
"Vietnam's diesel demand growth is stagnant," said a Singapore-based dealer. "It shows the country has little tolerance for high oil prices."
Indonesia has been supporting the market with a spate of higher diesel imports, aimed at covering refinery maintenance as well as replenishing domestic stockpiles, which were heavily drawn down when Pertamina was trapped in financial difficulties.
But dealers said Indonesia's October diesel imports might slow following heavy purchases of more than 8 million barrels in each of August and September.
Even if China decides to raise retail fuel prices for the fourth time this year, any increase would have to be at least 20 percent just to meet import costs for distributors, as domestic prices stay below international levels, analysts said.
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