WRAPUP 1-Gaiety at Asia oil traders' bash masks murky outlook

By Jennifer Tan SINGAPORE, Nov 6 (Reuters) - Merry-making at the annual bash for Asia's oil traders notched up this year, lifted by signs of recovery and rising crude prices, but the carousing failed to mask an outlook clouded by chronic oversupply. Recent signs of an industry comeback have buoyed sentiment: Asia's oil derivatives market saw its best month this year in October in terms of volumes and profits, while energy firms such as Russia's LUKOIL are embarking on regional expansion plans. Oil resumed its climb above $80 a barrel this week on positive economic data from the United States, the world's top energy user, though the high prices are deemed unjustified due to bulging global fuel supplies and could strain the economy. Persistently weak diesel demand and poor margins continue to worry the industry. This has created a huge surplus in distillates, most of which are stored on ships off Europe and the Mediterranean. "People were partying a lot harder at APPEC this year. The per hour alcohol intake looks like a jet contango curve -- the levels have gone off the charts," said a distillates trader with a regional refiner. The three-day Asia Pacific Petroleum Conference (APPEC) kicked off on Tuesday with a forum and more than two dozen evening bashes at hotels ranging from the Ritz Carlton to the Four Seasons and the Fullerton. "But there's still a lot of uncertainty. It's anybody's guess how next year will turn out. The question is: are people drinking to remember or drinking to forget?" Others were cautiously upbeat. "We're still positive, hopeful, that Asia will be able to shake off the woes plaguing economies in the West," said a regional fuel oil trader. The return of risk appetite to the Asian oil derivatives market, after more than a year in the doldrums, is a sign of spreading optimism in the industry. According to anecdotal evidence, banks are more relaxed about giving credit now versus six months ago, counterparties are also more willing to take on credit risks. One broker said his firm saw its best returns for the year in October, with middle distillates leading with 25 percent more volumes from the average of about 40 million barrels a month, while fuel oil and naphtha saw around 10 percent increases. Trading or speculative plays, noticeably absent for much of the last 12-15 months, are becoming a common feature again in the last three to six months. OVERSUPPLY WORRIES LINGER Energy firms are poised to capitalise on the expected recovery in Asia's oil products demand. LUKOIL, Russia's No. 2 oil producer, plans to expand its trading business in Asia, especially in naphtha and fuel oil, by first-half 2010, after losing four senior traders in recent months, Gati al-Jebouri, the CEO of its trading arm Litasco, said at the forum. Al-Jebouri said the impact of the downturn on the oil industry has been milder than expected. "(But) we are not out of the woods yet. We have to wait and see how things will pan out in the next three to four months," he said. For some, fears of a double-dip recession still loom large, especially when governments start to scale back their stimulus spending packages next year. "I'm worried about a W-shaped recovery. Look at the U.S. -- it achieved third-quarter GDP growth largely because of stimulus spending," said a fuel oil trader with a refining firm. "Once that stops, what is going to happen? The growth data is not convincing, given the weak state of demand." Edward Morse, Chief Economist of New York-based broker-dealer Louis Capital Markets, said the oversupply in oil suggested that crude prices above $40-$50 a barrel might not be justified. "The physical oil market is showing an abundance of supply and even an oversupply of product and crude inventories, which should weigh heavily on prices," Morse told the APPEC gathering. "Official OPEC and IEA balances point to persistent oversupply in crude stocks. A closer look shows no commercial stockdraw through 2010," he added. The key global issue in 2010 is the recovery in distillate demand and how far distillate inventories will fall, Morse said. "We project that for every 1 percent increment in global GDP, diesel demand should grow by at least 1.25 percent," he said. Distillates on floating storages globally are poised to top 80 million barrels by end-November, banking on a severe winter to help ease supplies which are expected to remain high well into the new year, traders and shipbrokers said. For graphics showing the list of distillate volumes, click: http://graphics.thomsonreuters.com/119/CMD_DSTTNK1109.gif "With strong growth in Q4 and 2010, total distillate demand could rise as much as 1.4 million barrels per day over six quarters, but so far, distillate demand growth still looks inconsequential," Morse added. (Editing by Ramthan Hussain) (([e-mail]; [phone]; Reuters Messaging: [e-mail])) Keywords: OIL ASIA/APPEC (If you have a query or comment on this story, send an email to [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.