LAUNCESTON, Australia (Reuters) - Higher fuel exports from China loom as the major threat to an otherwise fairly positive outlook for crude oil refiners across Asia, who have seen margins recover ahead of significant changes to the shipping industry.
China has raised quotas for the export of refined products for 2019, allocating a third batch totalling 6 million tonnes, three traders told Reuters on Wednesday.
This brings the total allowed for the year so far to 48.15 million tonnes, up from 43 million tonnes for the same period last year.
China allocates export quotas in batches throughout the year and has steadily been increasing these since 2015 when refining capacity started to exceed domestic demand.
There is no guarantee that all of the quotas will be used. But it’s worth noting that China’s exports of refined fuels were 32.52 million tonnes in the first half of the year, up 7.3% from the same period in 2018.
The quotas were granted to four state-owned companies including top refiner Sinopec, PetroChina, Sinochem Group and CNOOC Group.
Private refiners such as Hengli Petrochemical Co, which commissioned its 400,000 barrels per day (bpd) plant this year, didn’t receive quotas.
But it doesn’t really matter who gets the quota because if Hengli can’t export, it will sell into the domestic market and displace supplies from those refiners who are authorised to export.
This means the chances are that China will continue to export increasing volumes of gasoline, diesel and jet kerosene into Asian markets.
China customs figures show that diesel exports were 18.2% higher in the first half of 2019 compared with the same period a year earlier, coming in at about 496,000 bpd, while jet kerosene shipments jumped 21.9% to 364,000 bpd.
China’s gasoline exports were down 8.8% in the first half to about 318,000 bpd, but the new quotas granted make it likely that these will rise in the second half of this year.
This could put downward pressure on Asian refining margins, which have been recovering in recent weeks, with the profit from processing a barrel of crude in Singapore reaching $9.37 in July, the highest in nearly two years.
It has since fallen back to $6.09 a barrel, but this is still well above the $1.52 low for the year, reached in late January.
Margins for both gasoil, the base for diesel and jet fuel, and gasoline have been improving.
Benchmark gasoil with 10 parts per million (ppm) sulphur content reached an eight-month high of $17.06 a barrel on July 22, and was at $16.69 at Wednesday’s close.
The margin in Singapore for 92-RON gasoline reached $8.75 a barrel on July 12, the highest since April, although it has since fallen back to $4.38, a level still well above the $2.85 loss per barrel recorded in late January.
Gasoline margins had been boosted in June because of lower exports from India, which shipped out 232,000 bpd, well down from 369,000 bpd in May.
However, with Indian refiners returning from maintenance and Chinese producers receiving additional export quotas, the chances are more gasoline will be available in Asia’s export markets.
This will especially be the case when the northern hemisphere summer ends and U.S. refiners devote more of their production to exports once domestic demand wanes after the summer driving season.
For gasoil the picture is slightly murkier. In theory the middle distillate should be performing strongly, given the expectation of increased demand next year from the shipping industry.
From January, ships will have to comply with new regulations that lower the amount of sulphur permitted in their fuel to 0.5% from the current 3.5%.
This is expected to boost demand for both marine gasoil and very low-sulphur fuel oil, although there is still uncertainty as to how much.
Ship owners can switch to cleaner, but more expensive fuels, or they can install scrubbers, devices which remove the sulphur after the fuel has been burnt.
Refiners are currently building up stocks of lower-sulphur fuels and running down inventories of higher-sulphur fuels, a move that should boost refining margins as more of the cleaner fuels are needed to build adequate supplies ahead of the change.
But additional Chinese exports, and the risk of lower diesel and jet fuel demand from slower economic growth in Asia, may be enough to offset the shipping rule changes.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Kenneth Maxwell