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Zainab Calcuttawala

Zainab Calcuttawala

Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on…

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Chinese Fuel Dump Weighs On Asian Refiners

Refiners in Asia are having a tough time making profits as diesel and distilled fuels from Chinese exporters flood markets, emerging reports show.

The China National Petroleum Corp. said it plans to increase the rate at which it re-exports the fuel that it does not want or need by over four times during 2018 – effectively flooding Asian markets. Refiners across the continent now face dual price pressures on their profit margins. Higher oil prices push oil products prices up, while a China-driven flood threatens to lower demand continent-wide.

The CNPC said in its annual report that it plans to ramp up net oil-product exports by up to 31 percent in 2018, compared to an increase of just 7 percent last year. Diesel exports will rise even further, by 47 percent, the state-run company said.

World Oil reports that diesel prices had been enjoying a recent “renaissance” as oil prices show strong growth. Gasoil rates had not been higher since 2015, as inventories in developed countries shrink nationwide.

The last time China flooded the market with its leftovers was back in 2015, when the country’s excess cargos lowered profits to below $8 a barrel to the lowest level in at least half a decade.

The market dump is occurring as China’s oil demand continues to rise by 4.6 percent in 2018, but slower than last year, CNPC predicts.

Last year, China overtook the United States as the world’s largest oil importer, with its dependency on imports reaching 67.4 percent. This year, this could climb further to 68.8 percent, even if there is a recovery in domestic production, to support the rising demand. But Beijing’s emphasis has been on cleaner fuels and efficient energy use to reduce carbon emissions. Related: Iraq Is Troubling The Oil Majors

In addition, Chinese refiners have plans to add some 36 million metric tons in annual refining capacity over the coming years, which equals to about 723,000 bpd in refined oil products produced domestically. The country’s total capacity, then, will reach 808 million tons annually, or 16.23 million barrels daily – further reducing the need for the excess imports.

Most of this additional capacity will come from the teapots, whose role in China’s energy market is becoming increasingly prominent. With this additional capacity, the independent refiners will come to account for a third of the country’s refining capacity, which by 2020 will rise to 36 percent.

In a rather unexpected move last November, China raised the crude oil import quotas for “non-state trade”—basically for independent refiners—by 55 percent for 2018 compared to 2017, giving the teapots widened access to China’s oil imports. Non-state companies now can begin applying for 2018 crude oil import quotas for a total of 142.42 million tons, or some 2.85 million bpd, up from 91.73 million tons in total quotas for this year. Related: Oil Rig Count Declines Amid Falling Prices

In some areas, teapots are even merging together to boost their coordination amid fierce competition from state refiners. The Shandong province—home to more than 70 percent of teapots—has authorized one such consolidation, Xinhua news agency reported late last year. Major independent refiners, including the largest, Shandong Dongming Petrochemical Group, are the founding shareholders of the new conglomerate. Private sector activity is heating up as a “bigger is better” mentality penetrates Chinese small businesses in the energy sector.

A new wave of market efficiency measures, as well as a weaker demand growth curve, is leading China to reverse the over-ambitious buying strategies it employed over the past few years. Refiners from South Korea to India to Japan are set to see margins fall as crude prices rise to accommodate the Organization of Petroleum Exporting Countries’ production reduction strategy, while demand falls from a new oversupply.

By Zainab Calcuttawala for Oilprice.com

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