COLUMN-Chinese fuel exports hurting Asia refinery margins: Clyde Russell

Tue Mar 26, 2013 12:59am EDT

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, March 26 (Reuters) - The profit from making gasoline and gasoil in Asia has plunged recently and while several factors may be at work, it's no coincidence that the weakness has coincided with a jump in China's fuel exports.

The gasoline margin, or crack GL92-SIN-CRK, fell to $10.66 a barrel on Monday, the lowest in 1-1/2 weeks and 32 percent below its peak for the year, reached on Feb. 15.

The crack for gasoil fell to $16.27 a barrel on Monday, the lowest since June last year and off 24 percent from its high for the year, reached on Feb. 24.

Chinese exports of gasoline have leapt almost 33 percent in the first two months of the year from the same period a year ago to the equivalent of 93,450 barrels per day (bpd), with imports being virtually zero.

The performance in January and February is also well above the 56,406 bpd of net exports recorded over the whole of 2012.

Net exports of what Chinese customs terms light diesel, the main type of gasoil, totalled 65,908 bpd in the first two months of 2013.

This is a major turnaround from net imports of 7,659 bpd over the same period last year, and also vastly greater than the net exports of 18,750 bpd over 2012.

What the customs data show is that Chinese refiners are so far choosing to use the new capacity added in recent months to boost exports, rather than cut run rates.

Even though apparent oil demand in China rose 4.9 percent in February on the year to about 10.14 million bpd, the world's second-largest crude user still has excess refining capacity available, with estimated capacity at about 12 million bpd.

Crude runs were 9.84 million bpd in February, up 6 percent from the same month in 2012, and this was achieved despite the week-long Lunar New Year at the start of the month.

Over the first two months, refiners processed about 9.98 million bpd, and with margins positive, the chances are they will continue to process more crude, even though refined fuel stocks rose 6 percent by end-February from a month earlier.

The gain in fuel inventories makes it more likely that Chinese refiners will continue to export, at least in the short- to medium term.

Having increased Chinese gasoline and gasoil cargoes in the market is undoubtedly bearish for profit margins at Asian refiners, but it isn't the only factor that can influence the market.

The gasoil crack is also being affected by soft regional demand and maintenance at some refiners, with the spread between the front and second months flipping into contango on Monday, the first time this has happened in 2013.

This shows that the market does not expect the current weakness to continue, and it's possible that major diesel buyers Indonesia and Vietnam will increase purchases in coming months.

Higher diesel demand in Europe as summer approaches may also result in cargoes flowing west, something that has been constrained recently by soft prices in Europe.

Higher demand for gasoline from the United States ahead of the summer driving season may help boost margins in Asia, but more gasoline may be available from Indian refiners as the South Asian nation mandates blending in 5 percent ethanol by June.

However, when discussing prices, it's important to distinguish between a structural shift in the market and the ebb and flow of daily news.

If Chinese refiners continue to export for the rest of 2013 at the same pace as they did in the first two months of the year, that amounts to a structural shift.

In this case, refinery cracks may shift to a lower base, from where they can be influenced higher or lower by the daily news flow.

The last time the Chinese were significant exporters of diesel, in 2009 and 2010, the crack ranged between $4.42 and $15.42 a barrel.

However, in the first half of 2012, when the Chinese were net importers, the crack ranged between $14.18 and $19.46 a barrel.

It's not guaranteed that Chinese refiners will continue to export at the pace of the first two months, and much will depend on the cost of crude and the state of domestic demand.

But if they do, Asian refiners may have to adjust to lower profit margins. (Editing by Clarence Fernandez)

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