UPDATE 3-China may tap state reserves for diesel shortage-exec

Thu Nov 11, 2010 7:35am EST

Related Topics

* Record refinery runs, diesel export cuts to lift supply

* Rising crude prices, government power cuts behind shortage

* Resumes diesel imports after a 2-year hiatus- trade

* Sinopec offers diesel bonus to boost output

(Adds Sinopec's diesel incentive in par 6,7 )

By Chen Aizhu and Jennifer Tan

BEIJING/SINGAPORE, Nov 11 (Reuters) - China is considering tapping state refined fuel reserves to tackle a weeks-long diesel shortage, while Unipec has imported 70,000-80,000 tonnes of diesel for late November delivery, its first in almost two years.

While state refiners are confident the supply squeeze will ease significantly by end of November, China may need to import more cargoes for December and January delivery, or at least until domestic production catches up with demand, traders said.

The country's oil duopoly China Petroleum & Chemical Corp (Sinopec) (0386.HK) (600028.SS) (SNP.N) and PetroChina Co Ltd (0857.HK) (601857.SS) (PTR.N) both said they would boost refinery production to record levels this month.

With other measures including slashing diesel exports and postponing regular maintenance, refiners would be able to turn the market around within a few weeks, two industry executives told Reuters.

"We are studying the option of using state fuel reserves. We have not used them yet, but if needed there is enough to cope with the shortage," said a senior executive with a state refiner.

In a fresh bid to boost diesel production, Sinopec offered its plants a bonus of 1,000 yuan ($151) for each tonne of extra diesel output for this month, two company sources told Reuters.

"It's an internal subsidy -- our fuel sales departments paying us the incentive for each tonne of extra diesel output. But each plant has a limit for how much extra production it's entitled to," said a Sinopec refinery official.

China has never reported the size of state fuel reserves -- considered a state secret -- but industry officials have said reserves have been expanding since 2009 to cope with emergency shortages amid fast-growing demand in the world's second-largest oil consumer.

The diesel shortage, which started in late October and led to rationing at hundreds of fuel stations and queues of trucks, forcing China to import diesel, traders said.

Unipec, the the trading arm of China's Sinopec (0386.HK), has bought 70,000-80,000 tonnes of 0.2 percent sulphur and/or 500ppm sulphur diesel for late November arrival, three industry sources told Reuters, but officials at Sinopec's trading arm Unipec denied any purchases.

"China's imports won't last for long, but at least from December to February, they could import from the spot market to make up the difference between domestic production and demand," said a trader with an Asian refinery.

Another trading source agreed. "We're hearing they are considering importing another 80,000-100,000 tonnes for December delivery."

The shortage, less serious than the supply squeezes before 2009, was triggered in part by the state government's rushed drive to limit power supplies to small industries in a bid to meet energy-saving targets. [ID:nTOE69Q03P]

Cut off from state grids, small industries have been forced to fire up stand-alone diesel generators.

The recent steady rise in global crude prices CLc1 to a 25-month high near $90 per barrel was a contributing factor, prompting Chinese fuel dealers and bulk end-users to stock up ahead of another price rise.

DIESEL CRACK AT 22-MTH HIGH

Thanks to the supply crunch in China and higher spot demand from Indonesia, Asian gas oil's front-month crack has risen steadily over the past four sessions, hitting a 22-month high of $14.62 a barrel to Dubai crude on Thursday.

Elsewhere, diesel demand also appears to be improving.

European demand has also firmed, with the crack spread between ICE gas oil and Brent crude LGO-LCO1=R jumping to above $13 a barrel on Wednesday, after data from the U.S. Energy Information Administration (EIA) showed a higher-than-expected 5 million barrel drop in U.S. distillate stocks. [EIA/S]

Distillate demand over the past four weeks was up 16 percent from the same period a year ago, the report showed, tempering expectations for arbitrage cargoes to Europe ahead of winter.

Last month, data from ship broker ICAP showed that distillate volumes held in floating storage in the English Channel fell 2.7 million barrels to 14.1 million barrels by Oct. 15 from mid-September.

Globally, volumes of distillates in floating storage fell by 2.3 million barrels to 31.9 million over the same period, as draws in the English Channel were partly offset by a build in east Africa.

This compares with a peak of around 100 million barrels in December 2009. (Editing by Manash Goswami and Keiron Henderson)

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