Chinese refiners have recently ramped up crude processing rates and fuel exports in a sign that more refined products could leave China and head to the Asian market at the end of this year and early next year. Although most Chinese exports, especially diesel exports, are largely expected to stay within the Asian region, higher fuel exports out of China could ease part of the fuel crunch, which is most evident in Europe and the United States. While higher exports to the Asian market could reduce regional refining margins, they could prompt more product flows from other Asian refiners to Europe.
Chinese Refining Output And Fuel Exports Hit Multi-Month Highs
Increased fuel export quotas and robust export demand pushed China’s overseas shipments of refined products surging by 36% annually in September to the highest level since June last year, official Chinese data showed this week.
China’s diesel exports more than doubled in September from the same month last year, to stand at 1.73 million tons, and were also significantly higher than the August exports, according to data from the Chinese General Administration of Customs. The volume of diesel exports in September was the highest monthly figure since July 2021, per Reuters estimates. To compare, China exported 830,000 tons of diesel in August 2022 and 780,000 tons in September 2021.
Between January and September, China’s fuel exports were still down, by 27.6%, per data from the General Administration of Customs cited by Reuters. The drop was due to the Chinese policy from 2021 to curb excess exports and lower processing rates at refiners due to slack demand amid the snap Covid lockdowns in China.
Tepid domestic demand and weakening margins have prompted independent refiners, the so-called teapots, to keep fuel processing rates reduced.
However, thanks to large state refiners back online after planned maintenance, refinery output in China saw its first year-on-year increase since November last year. According to data from the National Bureau of Statistics, cited by Reuters on Monday, refinery output in China was up by 1.9% in September compared to the same month of 2021 and stood at around 13.82 million bpd. That was much higher than the refinery production of 12.64 million bpd in August 2022.
Rising Fuel Export Trend Could Continue
So, signs emerged in September that China could begin to ramp up its fuel exports in the coming months.
The highest exports of fuels in September in 15 months come just as China issued its biggest fuel export quotas to its refiners for this year at the end of September. Chinese authorities have allocated 15 million tons of new fuel export quotas to its major refiners, and the quota could be rolled over into early next year.
The fresh batch of fuel export quotas was widely expected in a move seen as an attempt from China to revive its economic activity, which has suffered from COVID lockdowns and a real estate crisis since the spring.
At the same time, Asian fuel sellers are said to be increasing their shipments of diesel to energy-starved Europe, benefiting from the premium European buyers are willing to pay for the fuel amid a deepening global and regional deficit.
Fuel Markets Are Very Tight
Europe is four months away from banning imports by sea of Russian refined oil products and it’s still importing diesel from Russia ahead of the embargo. The ban could be yet another shock to the already tight fuel supply in Europe.
Diesel refinery margins in Europe and in New York and the prompt month spreads continue to rise, due to concerns about tighter fuel markets this winter, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Wednesday.
“Diesel inventories in the US are at lowest seasonal level ever heading into winter while the situation in Europe looks similar,” Saxo Bank said.
Despite a small 200,000 barrels increase last week in U.S. distillate fuel inventories, which include diesel, those inventories are still around 20% below the five-year average for this time of year, the EIA said in its weekly report on Wednesday.
It’s unlikely that China’s higher fuel exports will impact directly the European and U.S. diesel supply, but other refiners in Asia could boost exports to Europe in the coming months as the EU would be looking to replace its diesel imports from Russia.
“I think our traders believe most of the Chinese exports are going to stay in the region. And then, even if you kind of assume some of it comes into the North Atlantic Basin, in the short term, the French refinery strikes are really offsetting any of that,” Gary Simmons, Executive Vice President and Chief Commercial Officer at U.S. refiner Valero Energy, said on the company’s earnings calls earlier this week.
“And longer term, it looks like, to us, any incremental volume coming out of China will be offset by further reductions in exports from Russia as the sanctions are ramped up,” Simmons added.
By Tsvetana Paraskova for Oilprice.com
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