China's Perfect Diesel Storm Could Hit Asian Fuel Market

Should Asia be bracing itself for a flood of gasoil from China in the second quarter?

It would certainly appear that the conditions for a sharp rise in exports of gasoil, the refinery term for middle distillate fuels diesel and kerosene, are in place.

These include stocks of Chinese oil products at a four-year high, rising refinery runs but soft domestic consumption, and gains in crude imports.

So far this year China has already been ramping up exports of middle distillates, with diesel shipments rising 736 percent to 1.52 million tonnes in the first two months of the year compared to the same period last year, while jet kerosene gained 28.8 percent to 1.92 million tonnes.

Converting the Chinese customs data to barrels per day (bpd) shows diesel exports at 190,000 bpd and jet kerosene at 250,000 bpd in the January-February period.

By comparison China exported about 147,000 bpd of diesel and 264,000 bpd of jet kerosene in 2015, meaning that while jet kerosene shipments are roughly steady so far in 2016, there has been a big jump in diesel shipments.

It's likely that diesel exports will continue to rise in coming months, given the internal dynamics of China's refining and fuel markets.

Commercial fuel inventories reached a four-year high in February, rising 17.3 percent from the previous month, according to a March 28 report from the official Xinhua News Agency.

Diesel inventories were 11.4 million tonnes in February, or about 85.5 million barrels, up 37.3 percent from 8.3 million tonnes in January, according to Reuters calculations based on the official data.

OUTPUT UP, DIESEL DEMAND DOWN
The rapid build in diesel inventories can be explained by the mismatch between refinery output and domestic consumption.

Oil product output was 51.92 million tonnes in the first two months of the year, up 8.5 percent from the same period in 2015, but consumption was only 44.51 million tonnes, a gain of 2.4 percent, China's state planning agency said March 29.

Although the National Development and Reform Commission didn't give precise figures, it said gasoline consumption rose 14.8 percent while diesel consumption fell 9.3 percent in the first two months of 2016.

What this shows is that refineries are more than likely running at rates that will ensure sufficient gasoline to meet domestic demand, but in doing so are producing too much diesel.

Refinery throughput rose 4.6 percent in the first two months of the year to 10.59 million bpd, the National Bureau of Statistics said on March 12.

Pulling together the various strands of Chinese refinery and fuel markets shows that the country is currently producing an excess of diesel and with domestic inventories already bulging, exports become the best way of relieving the pressure.

It's likely that Chinese exports will reach an Asian market that is already well-supplied with diesel.

Inventories of middle distillates in Singapore, Asia's main trading hub, rose to a five-month high of 13.64 million barrels in the week ended March 23, according to data from International Enterprise Singapore.

The comfortable inventory situation and muted demand growth for diesel, which is mainly used for transportation and industry, is already showing up in weaker margins for producing the fuel.

The premium of gasoil in Singapore over Dubai crude dropped to $8.56 a barrel on Wednesday, down 29 percent from its peak so far this year of $12.11 on March 9.

If China's refineries do ramp up exports of the fuel in coming weeks, it's likely that the gasoil margin will lose further ground.

By Clyde Russell