China’s diesel ex­ports a threat for Asia’s re­finer­ies

The Pak Banker - - BUSINESS -

China's record fuel ex­ports are tak­ing some of the sheen off cheap crude in Asia. That's be­cause the coun­try's record refining rates and prod­uct ex­ports are swap­ping a glut of crude with a flood of prod­ucts. Re­gional re­fin­ers may see mar­gins eroded by in­creas­ing ship­ments this year of Chi­nese fuel, par­tic­u­larly diesel, ac­cord­ing to Cit­i­group Inc. and San­ford C. Bern­stein & Co. The coun­try ex­ported more prod­ucts than it im­ported for the first time last year and shipped over­seas record vol­umes of diesel, kerosene and gaso­line.

"You are see­ing, in Asia but also glob­ally, a bit of a move of the crude oil sur­plus into the prod­uct mar­ket," Ivan Sz­pakowski, an an­a­lyst at Cit­i­group Inc. in Hong Kong, said in an in­ter­view. "It's go­ing to put pres­sure on re­fin­ery mar­gins in the rest of Asia, which have been held up over the last cou­ple of years by the re­ally low crude prices."

Oil crashed below $30 a bar­rel this month on spec­u­la­tion the global glut that's dragged prices down since 2014 would worsen af­ter sanc­tions cap­ping Iran's crude sales were lifted. The diesel mar­ket is al­ready over­sup­plied and will feel the great­est im­pact from in­creased Chi­nese fuel ex­ports, ac­cord­ing to Si Min Ngai, a con­sul­tant at FGE, an en­ergy re­searcher.

The profit from mak­ing diesel -- the so-called crack spread -- is ex­pected to av­er­age less than $10 a bar­rel this year in Asia, a fall of al­most $5 from 2015, Ngai said by e-mail. China will ship about 250,000 bar­rels a day of the fuel this year, ac­cord­ing to es­ti­mates by Ngai. That's 70 per­cent higher than last year's 7.16 mil­lion met­ric tons, or roughly 147,000 bar­rels a day. ICIS-China, also a re­searcher, fore­casts the coun­try will ex­port 226,000 bar­rels a day. "There will be an over­sup­ply of diesel in China as re­fin­ers boost runs to feed gaso­line de­mand," Eu­gene Lin­dell, an an­a­lyst with Vi­enna-based JBC En­ergy GmbH, who fore­cast Chi­nese diesel ex­ports at 270,000 bar­rels a day in the first quar­ter, said in an e-mail. "In­creased ex­ports will pres­sure middle dis­til­late cracks con­sid­er­ably."

Global av­er­age refining mar­gins -- the es­ti­mated profit from turn­ing oil into added­value fu­els such as gaso­line and diesel as well as loss-mak­ing by-prod­ucts such as fuel oil -fell 34 per­cent in the fourth quar­ter from the pre­vi­ous three­month pe­riod, the steep­est de­cline in eight years, to $13.20 a bar­rel, data on BP Plc's web­site show. The level has dropped to $11.90 for the first quar­ter of this year as of Jan. 20, ac­cord­ing to the com­pany.

Diesel de­mand, a barom­e­ter of the coun­try's in­dus­trial ac­tiv­ity, is fore­cast to stay flat or fall in 2016, while gaso­line con­sump­tion will rise by 200,000 bar­rels a day, the In­ter­na­tional En­ergy Agency fore­cast last month. The coun­try's diesel con­sump­tion last year dropped 3.7 per­cent from the pre­vi­ous year, Na­tional De­vel­op­ment and Re­form Com­mis­sion said Mon­day.

"China's oil prod­ucts ex­ports will put a tight lid on Asian refining mar­gins," Gor­don Kwan, a Hong Kong­based an­a­lyst at No­mura Hold­ings Inc., said. "Thus pre­vent­ing run­away oil prices." China's oil re­fin­ers raised pro­cess­ing to a record 10.48 mil­lion bar­rels a day last year, ac­cord­ing to the coun­try's Na­tional Bureau of Sta­tis­tics.

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