China Unlikely to Repeat Last Winter's Surge of Fuel Exports

November 21, 2023

© Igor Groshev / Adobe Stock
© Igor Groshev / Adobe Stock

A surge of diesel and gasoline exports from China in the last northern winter eased then-prevailing fuel shortages in Asia but a repeat performance this year is unlikely.

China's exports of refined products have eased from high levels in recent months, partly as a result of stronger domestic demand, but a lack of available quotas and shrinking profit margins for fuels have also played a role.

In the northern winter of 2022-23 China played an outsized role in easing a squeeze on the availability of refined fuels, caused largely by the loss of some shipments from Russia as Western countries sanctioned it over its invasion of Ukraine.

Diesel exports peaked at 2.39 million metric tons in January this year, before dropping to just 290,000 by June, according to official customs data.

However, the release of export quotas by Beijing coupled with high profit margins in Asia saw China's diesel shipments rebound with exports rising to 1.26 million metric tons in August.

Since then they have eased back, dropping to 1.18 million metric tons in September and 1.11 million in October.

November exports are expected to less than 700,000 metric tons, according to an estimate by LSEG based on ship-tracking and port data.

As of Nov. 19, LSEG had only assessed 250,000 metric tons of diesel exports from China in November, while Kpler was estimating about 2 million barrels, equivalent to 266,000 metric tons.

China's refiners have been struggling with weaker profit margins for fuel sold in the domestic market, and while regional margins are higher, many refiners are being constrained by a lack of quotas.

The profit margin, or crack, for a barrel of gasoil, the middle distillate that is the building block for diesel and jet kerosene, at a typical Singapore refinery, ended at $23.94 on Monday, up from the recent low of $20.46 on Nov. 10, but 42% below the $41.54 peak from last winter, reached on Dec. 16.

The weaker margins for diesel are a further constraint on China's exports, and the likelihood of a demand-led rally this winter is dissipating amid signs of ample supply in both Asia and Europe and concern over slowing global economic growth.

Gasoline shipments slump
It's a similar story for China's gasoline exports, with strength over the previous winter being replaced with current weakness.

China exported 770,000 metric tons of the light motor vehicle fuel in October, down from 1.09 million in September and about half of the peak of 1.49 million from last winter, in November 2022.

Shipments this month are likely to be around 600,000 metric tons, according to LSEG, which would be the weakest month this year.

The profit margin on making a barrel of gasoline from Brent crude in Singapore ended at $8.84 on Monday, down from the recent peak of $13.15 from Nov. 10, and less than half the high last winter of $18.32 from Jan. 26.

The weaker profits mean that for many Chinese refiners it becomes a marginal decision as to whether it makes more sense to trim processing rates, or to try to export surplus product, assuming the refiner still has quotas available.

The pattern in China's refined fuel exports since last winter show that it can act as a swing supplier of products, ramping up exports when margins surge, but pulling back when they decline.

However, the challenge for regional product markets is that China is not always a market-driven player, with its quota system for exports allowing authorities to either encourage or discourage exports according to their policy imperatives.

(Reuters - The opinions expressed here are those of the author, a columnist for Reuters. Editing by Robert Birsel)

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