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China To Lower Export Quotas For Majors By 40 Percent

Offshore Drilling

Larger quotas expected later in 2017

China will cut its export quotas to the country’s oil majors by 40 percent in the first round of licenses for 2017, reports Reuters, even as traders expect allowances for overseas sales to meet or exceed this year’s record levels.

The Ministry of Commerce and the General Administration of Customs said the four state majors will be allowed to sell 12.4 million tonnes (90.9 million barrels) of gasoline, gasoil and jet fuel abroad next year, down from 20.5 million tonnes in the same round this year. The sharp decline in export quotas has more to do with out-sized goals in 2016 than it does with demand in 2017, however.

“The shrinking quota doesn’t reflect shrinking demand from overseas. Instead, it reflects a shift in company exporting strategy,” said a China-based trader who declined to be named, adding that companies were better matching exports to quotas.

“We expect the total quota for 2017 to be on par or a bit higher than 2016,” the trader added.

China issued a record-high export quota of 46.1 million tonnes of oil products in 2016, up 80 percent from 2015. In the first 11 months of the year, it exported 43 million tonnes of oil products, up 35 percent from a year earlier.

Related: Outlook For Coal Unlikely To Improve

Traders expect that quotas will be increased in the second quarter when demand from construction and transportation pick up after the winter slowdown. China usually releases three or four rounds of quotas per year.

Teapot refiners removed from quota list

As part of the ongoing effort to liberalize its oil and gas industry, China added smaller, independent refiners to its overall quotas last year. The so-called “teapot” refiners have been removed from the most recent round of quotas, however.

Teapots account for only a fraction of China’s fuel exports, but dropping them will hand the export business back to the majors and deal a blow to the small but fast growing group that has brought new competition to China’s oil industry.

With 6.1 million tonnes, Sinopec Corp (ticker: SNP) won about half of the total in the first round. Sinochem Group did not receive any quota for jet fuel.

Out of the three products, gasoil accounted for 5.3 million tonnes, 42 percent of the total allotted to the four majors; gasoline for 3.7 million tonnes, 30 percent of the total, and jet fuel with 3.5 million tonnes made up the remaining 28 percent of products.

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Domestic demand may wain as prices rise

On the other side of the import/export equation, China – the second-largest consumer of oil in the world after the U.S. – may start have less of an appetite for crude in 2017 as it becomes more expensive.

China has been taking advantage of lower crude oil prices to fill its strategic petroleum reserves, but as the cost of crude goes up, the country may stop its opportunistic purchases.

“Emerging market demand, and specifically from China, has been really strong in 2016,” Matt Smith, head of commodities research at shipment-tracking firm ClipperData, told CNBC.

“However, they’ve been on these sorts of bouts of bargain hunting and opportunistic purchases to essentially fill their stockpiles, their strategic reserves. And so, as prices rise, and as they’ve risen recently, we’re likely to see less of that bargain hunting next year,” he said.

By Oil & Gas 360

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