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Middle distillates complex seen holding steady despite weak China exports in July

Chinese refiners are likely to export 3.19 million mt of clean oil products in July, down from an estimated 3.72 million mt in June, though the decline is unlikely to boost the Asian middle distillates complex as volatile arbitrage economics offset the recent uptick in refinery margins, industry sources said.

Key oil majors in China are set to export 650,000 mt of gasoil in July, down from 900,000 mt in June while jet fuel outflows are expected to fall to 1.87 million mt from 1.98 million mt over the same period, industry sources said. Meanwhile, gasoline exports are estimated to be at around 670,000 mt in July, down from 840,000 mt in the preceding month.

“I think the reduce in July export plan is a quota thing,” said a Chinese trader.

China has issued two tranches of clean product export quotas totaling 33 million mt, up 17.9% from the corresponding rounds in 2023. The country’s total gasoline, gasoil and jet fuel outflows over January-May totaled 16.44 million mt, latest General Administration of Customs data showed.

While GAC’s data for June will only be released in mid-July, about 12.84 million mt of quota would remain after factoring in market estimates of 3.72 million mt of clean oil product exports.

Export margins decline

At the same time, declining export margins for gasoil and gasoline could disincentivize outflows. Export margins for gasoil fell to around $1-$1.50/b in June from $3-$4/b in May while that of gasoline fell to minus $3-$4/b from around plus $1.50/b over the same period, industry sources said.

Export margins for gasoil are projected to be steady for gasoil while gasoline could slip further to around minus $5/b, sources added. They attributed the decline to lower run rates following seasonal refinery turnaround which have contributed to a rise in domestic retail prices.

Chinese oil companies are also required to prioritize supplies to meet domestic demand rather than capture export margins.

On the jet fuel front, trade sources estimate that China’s jet fuel exports of 1.87 million mt in July will comprise around 600,000 mt of bonded jet fuel. Bonded jet fuel is considered a larger indicator of demand than actual exports, sources said earlier.

“[July’s export] volume is not big, [China’s] waterborne exports are regularly around 1 to 1.2 million mt,” said a Singapore-based trader.

Domestically-produced jet fuel barrels for bonded bunkering into outbound flights at China’s airports are reported as exports by customs and required to use export quotas, S&P Global Commodity Insights reported previously.

Refiners conservative on exports

“Given there has been a constant discrepancy between China’s planned and actual export volumes, we can only use planned exports data as a reference, and not assume that actual exports will closely align with planned numbers,” said Shi Fenglei, Commodity Insights’ downstream research and analysis director.

“Despite this, current plans suggest that domestic refinery attitudes toward exports are conservative this year, due to unfavorable arbitrage opportunities amid a decline in Singapore crack spreads,” she added.

The front-month EFS spread, an indicator of East-West arbitrage flows, was assessed at an average of minus $24.59/mt over June 1-26, narrowing from May’s average of $25.08/mt, Commodity Insights data showed. At the 0830 GMT Singapore close June 26, the spread was assessed at minus $28.82/mt.

“Structurally, we expect that exports will increasingly favor middle distillates, mainly as a result of significantly reduced gasoline arbitrage opportunities,” Shi said.

East-West arbitrage economics remain uneven

In the near-term, the Asian middle distillate complex could see some support from East-West arbitrage opportunities.

Notably, two or three Long Range II-sized jet fuel cargoes will load from the Far East and head toward the West, market participants said. No further details could be confirmed.

“I don’t think current arbitrage incentive is enough but moving some cargoes to [the] West is still batter [than] piling up inventory in [the] regional market,” a second trader said.

On the gasoil front, supply and demand is anticipated to remain balanced as arbitrage opportunities to move swing barrels from the Persian Gulf to East and West Africa avail, sources said.

Still, ongoing tensions in the Red Sea could continue to curb arbitrage flows.

“I think with the Red Sea tensions, a lot of cargoes will still be coming into Asia,” a trade source cautioned.

Despite this, the Platts FOB Singapore 10 ppm sulfur gasoil cargo crack spread against front-month cash Dubai, which measures the relative strength of the product to the crude it is refined from, averaged $15.30/b over June 1-26, widening from $13.28/b in May, Commodity Insights data showed.

Similarly, the Platts FOB Singapore jet fuel/kerosene cargo crack spread averaged $14.61/b over June 1-26, from $11.39/b in the preceding month.
Source: Platts

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