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China’s Diesel Exports Threaten to Drown Asia’s Oil Refineries

China’s record fuel exports are taking some of the sheen off cheap crude in Asia.

That’s because the country’s record refining rates and product exports are swapping a glut of crude with a flood of products. Regional refiners may see margins eroded by increasing shipments this year of Chinese fuel, particularly diesel, according to Citigroup Inc. and Sanford C. Bernstein & Co. The country exported more products than it imported for the first time last year and shipped overseas record volumes of diesel, kerosene and gasoline.

“You are seeing, in Asia but also globally, a bit of a move of the crude oil surplus into the product market,” Ivan Szpakowski, an analyst at Citigroup Inc. in Hong Kong, said in an interview. “It’s going to put pressure on refinery margins in the rest of Asia, which have been held up over the last couple of years by the really low crude prices.”


Oil crashed below $30 a barrel this month on speculation the global glut that’s dragged prices down since 2014 would worsen after sanctions capping Iran’s crude sales were lifted. The diesel market is already oversupplied and will feel the greatest impact from increased Chinese fuel exports, according to Si Min Ngai, a consultant at FGE, an energy researcher.

The profit from making diesel — the so-called crack spread — is expected to average less than $10 a barrel this year in Asia, a fall of almost $5 from 2015, Ngai said by e-mail. China will ship about 250,000 barrels a day of the fuel this year, according to estimates by Ngai. That’s 70 percent higher than last year’s 7.16 million metric tons, or roughly 147,000 barrels a day. ICIS-China, also a researcher, forecasts the country will export 226,000 barrels a day.

Falling Margins

“There will be an oversupply of diesel in China as refiners boost runs to feed gasoline demand,” Eugene Lindell, an analyst with Vienna-based JBC Energy GmbH, who forecast Chinese diesel exports at 270,000 barrels a day in the first quarter, said in an e-mail. “Increased exports will pressure middle distillate cracks considerably.”

Global average refining margins — the estimated profit from turning oil into added-value fuels such as gasoline and diesel as well as loss-making by-products such as fuel oil — fell 34 percent in the fourth quarter from the previous three-month period, the steepest decline in eight years, to $13.20 a barrel, data on BP Plc’s website show. The level has dropped to $11.90 for the first quarter of this year as of Jan. 20, according to the company.

’Tight Lid’

Diesel demand, a barometer of the country’s industrial activity, is forecast to stay flat or fall in 2016, while gasoline consumption will rise by 200,000 barrels a day, the International Energy Agency forecast last month. The country’s diesel consumption last year dropped 3.7 percent from the previous year, National Development and Reform Commission said Monday.

“China’s oil products exports will put a tight lid on Asian refining margins,” Gordon Kwan, a Hong Kong-based analyst at Nomura Holdings Inc., said. “Thus preventing runaway oil prices.”

China’s oil refiners raised processing to a record 10.48 million barrels a day last year, according to the country’s National Bureau of Statistics. Diesel exports jumped nearly 75 percent, while gasoline and kerosene shipments both rose about 16 percent in 2015.

Oil refining will increase 5.3 percent this year while net exports of oil products — which strips out imports — will rise by 31 percent to 25 million tons, China National Petroleum Corp. said in its annual research report Tuesday.

Export Quotas

China more than doubled its first batch of fuel-export quotas for this year to 20.93 million tons, ICIS China said on Jan. 6. Five companies, including four independent refiners, obtained a combined 430,000 tons of fuel export licenses for the first time, it said.

The private refiners, accounting for about one-third of the nation’s total refining capacity, increased their combined operating rate to 50.1 percent of capacity as of Jan. 22, the highest since at least August 2011, after some of them obtained crude-import quotas, according to industry website Oilchem.net.

“Regional refiners enjoying a golden period of high margins are now at risk as China exports diesel at scale following de-regulation of crude import licenses,” said Neil Beveridge, a Hong Kong-based analyst at Bernstein. “Korean, Taiwanese and Southeast Asian refiners will be impacted by higher exports from China.”
Source: Bloomberg

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