Flow of unwanted oil from China is set to turn into a deluge

By Bloomberg News on 1/17/2018

SEOUL and BEIJING (Bloomberg) -- The pace at which China exports the fuel it doesn’t want is set to jump by more than four times in 2018, according to the nation’s biggest energy producer.

That’s a harbinger of bad news for processors in the rest of Asia -- from South Korea to Japan and India -- who now have to contend with higher crude prices as well as the threat of the flood dragging down refining margins. Government-issued quotas to sell oil products abroad may also expand this year in order to ease a large supply glut in the domestic market, an analyst at China National Petroleum Corp. said on Tuesday.

China’s net oil-product exports -- a measure that strips out imports -- may climb about 31% to 46.8 million metric tons this year, CNPC said in its annual report released in Beijing. Shipments rose about 7% in 2017.

In particular, exports of diesel -- also known as gasoil -- are expected to soar 47% to 23.8 million tons in 2018 from a year earlier, according to the CNPC report.

While surging demand for diesel -- used to power everything from trucks to irrigation equipment and ships -- has driven a rally in oil prices, the expected jump in exports from China may dilute the gains that can be made from selling the fuel in Asia. Profits from turning crude into gasoil in the region are currently near the highest level since 2015, enjoying a renaissance as inventories have shrunk.

The effect that China’s fuel exports can have on margins was illustrated in 2015 when cargoes from the nation swamped the Asian market, dragging profits from making the fuel in the region to below $8/bbl and the lowest level in at least five years. The so-called crack spread was at $15.65/bbl as of 6:57 p.m. Seoul time on Wednesday.

While China’s domestic apparent oil consumption will still rise 4.6% to 615 million tons, the pace of growth will be slower than last year, according to the company.

Economic shift

That’s because of factors including President Xi Jinping’s pledge to focus on quality rather than quantity for economic growth, property market adjustments and stricter environmental-protection policies.

While China tightened its fuel export quotas in 2017 over concerns that excessive imports and overseas shipments of commodities may cause air pollution, it’s likely to expand the allocations this year, said Li Ran, an analyst with CNPC’s Economics & Technology Research Institute.

The government has traditionally used a quota system to manage outbound shipments, issuing regular allotments that specify sales volumes.

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