COLUMN-China refiners key for Asian jet fuel market: Clyde Russell
--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Aug 22 (Reuters) - The surge in China's diesel exports this year has grabbed headlines in the Asian oil products market, overshadowing strong gains in shipments of jet kerosene.
While gasoil is a far bigger market than jet fuel, it could be argued that China's increased presence in the jet kerosene market has the potential to be more influential on the overall supply-demand balance, and hence pricing.
China exported 791,690 tonnes of jet kerosene in July, a leap of 34 percent over the same month a year ago, taking the total for the first seven months of the year to 5.141 million tonnes, a gain of 22 percent over the same period in 2012.
This works out to about 188,000 barrels per day (bpd) of exports in the first seven months, which is almost three times the amount of exports of what Chinese customs terms light diesel, which stood at about 66,000 bpd for the same period.
Of course, China also ships in these products.
Its jet kerosene imports were about 122,000 bpd in the first seven months, while those for diesel were a relatively insignificant 9,000 bpd.
This does even the net trade out, with net jet fuel exports of about 66,000 bpd and net diesel exports of 57,000 bpd.
Still, it shows that China is effectively a bigger player in the jet kerosene market than it is in diesel, and this may be showing up in the pricing of the two products in Asia.
It also worth bearing in mind that jet kerosene sales to foreign airlines refuelling in China count as exports, but it's unlikely that much of the increase in exports is because of increased international air traffic.
The premium, or crack, for Singapore-priced jet kerosene over regional benchmark Dubai crude is normally slightly above the premium for gasoil over Dubai.
However, this difference, known as the regrade, reversed for much of 2013, with gasoil commanding a bigger premium than jet fuel, although which product is more valuable compared to Dubai has been swapping around so far this month.
Part of this can be explained by a surplus of gasoil depressing the crack, but jet fuel was first marked lower over fears the European Union would restrict imports from the Middle East and India, before recovering when the EU backtracked.
But short-term movements in response to market news don't override the emerging trend that jet fuel may lose its relative premium over gasoil in Asia.
Much depends on what the Chinese do with their surplus refining capacity.
Chinese refineries processed an average of 9.579 bpd of crude in the first seven months of the year, a rise of 4.5 percent over the same period last year.
However, diesel output was up a mere 0.5 percent to 3.54 million bpd, while kerosene production leapt 15.9 percent to about 513,000 bpd.
This shows that the refiners have chosen to optimise kerosene out of the middle distillates.
Part of this can be explained by the slower growth the Chinese economy experienced in the first half of 2013, which led to softer demand for diesel.
But it also appears that Chinese refiners have recognised that if they produce more jet kerosene and export it, they can increase their returns.
JET FUEL OFFERS BETTER RETURN
China customs data shows that the average price for jet kerosene exported in July was $985.31 a tonne, equivalent to about $126 a barrel, which is higher than the $124.15 jet fuel closed at in Singapore on Wednesday.
For light diesel, customs data showed a July average price of $933.61 a tonne, equivalent to about $124.17 a barrel, compared with Wednesday's Singapore price of $123.87.
This shows that it's more profitable currently for Chinese refiners to export jet kerosene.
But the question is whether the prevailing situation is likely to continue.
Recent economic data point to the Chinese economy regaining some momentum, largely driven by infrastructure spending and large industrial companies.
This bodes well for increased diesel demand in China, which may prompt refiners to increase output of the transport fuel at the expense of jet kerosene production.
However, it's also possible that the Chinese will increase refinery utilisation, which currently is around 80 percent of the 12 million bpd available.
More refinery units are expected to come online in the second half of this year, taking total capacity to close to 12.7 million bpd.
Even if only some of this capacity is actually used, it means the Chinese will be easily able to meet rising domestic demand for diesel, but will also have a larger surplus of jet kerosene available for export.
European refinery maintenance in the next few months will likely lend support to jet fuel cracks as cargoes are drawn west from Asia and the Middle East.
But after this period of maintenance, it wouldn't be surprising if jet fuel cracks started to ease, with the key being to watch what the Chinese are doing with their refinery utilisation and the mix of products they produce. (Editing by Himani Sarkar)
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