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Sinopec Considers Oil Output Drop To Fight Domestic Glut

State-refiner Sinopec could cut oil output by a third to combat a domestic oil supply glut fueled by competition from independent refiners and slow demand.

"The company (Sinopec) is facing large pressure in the domestic fuel market as local plants boosted production," an anonymous official told Reuters. "There were run cuts last year, but the level under consideration for the third quarter is deeper than before."

Output will fall by three million tons, or 238,000 barrels per day, in the third quarter of this year, the source said.

"Demand is softening currently and export quotas are limiting Sinopec's export capacity," Michal Meidan of the consulting firm Energy Aspects said. "Around 600,000 to 700,000 bpd of new capacity is set to come on line over the second half (of 2017), so that's why Sinopec is looking to cut back its own runs."

Sinopec declined to comment on operational matters upon request.

A second source confirmed the cuts, but did not specify their size due to the possibility of further adjustments to monthly volumes down the line.

New federal regulations and Beijing’s increased favoritism towards nationalized oil refiners are pushing “teapots”, or small-scale independent refiners, to diversify their revenue sources, according to a report by Reuters in April.

Related: Top Asset Managers Still Bullish On Crude

In the fourth quarter of 2016, teapots suffered the transfer of control over national oil and gas exports to major government refiners—the largest of which is Sinopec—which cut the independent refiners out of foreign markets for refined petroleum goods. The move tempered the rise of the small-but-growing sector, which accounted for over 90 percent of China’s 2016 oil import growth.

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The changes in China’s regulatory landscape comes as the country commits to green energy goals in lockstep with the Paris climate change agreement of 2015. As a result, national fossil fuel consumption is now slumping. Last year, China’s oil demand growth was at a three-year low.

By Zainab Calcuttawala for Oilprice.com

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