China's rare run as a net fuel oil exporter to last one month

SINGAPORE Wed Oct 2, 2013 5:49am EDT

SINGAPORE (Reuters) - China's first run as a net fuel oil exporter in more than a decade likely lasted just one month, although the brief switch signals that the second largest oil consumer can no longer be counted on to soak up Asia's excess supplies.

China's fuel oil imports likely rose in September as refiners restocked after months of limited buying, industry sources said, flipping the country back to a net importer.

"Demand at this point and for the next few weeks will be slightly better than before as inventories are diminishing and will need to be replenished," a fuel oil purchasing manager with a Chinese end-user said.

China in August shipped out more fuel oil than it took in for the first time since 1999, according to consultancy Energy Aspects.

Most of China's imported fuel oil is used by small, independent teapot refineries to produce more valuable products such as gasoil and gasoline.

China National Chemical Corp (ChemChina), China's largest operator of teapot refineries, won a crude import quota this year and that means it needs less fuel oil. Crude is preferred to fuel oil as it yields more higher value products.

"China's position as a big importer of fuel oil is no longer guaranteed," said Amrita Sen, chief oil analyst at Energy Aspects, although adding that it was also too soon to classify the country as a net exporter.

"Even with increased refining capacity, (China) might not be ready structurally to become a net exporter. There could still be months when bunker demand is good," he said.

China's domestic fuel oil market has been chronically weak since the beginning of this year, due to anaemic bunker sales and lower demand for straight-run fuel oil from the teapot refineries.

ChemChina was granted an annual 2013 crude import quota of 10 million tonnes, or 200,000 barrels per day.

China may also open up its crude import market to more refiners next year, with quotas of at least 10 million tonnes being discussed for new entrants.

"This would tighten the Chinese fuel oil deficits and favour higher exports," said Richard Gorry, managing director of JBC Asia.

This could hurt the main suppliers to China's teapot industry, including Sinopec Corp (0386.HK)(600028.SS), PetroChina Co (0857.HK)(601857.SS), BP (BP.L) and Mercuria.

Fuel oil stocks in eastern China, which has the highest concentration of teapot refineries, fell by 18.4 percent to 487,000 tonnes over September 4-25, according to data from energy consultancy ICIS.

Premiums for the Russian straight-run 180-cst grade, M100, have risen in recent weeks to $92-96 a tonne, up from about $85 a tonne in August, on a cost-and-freight (CFR) China basis.

M100 is a popular feedstock with teapot refiners due to its high yield of middle distillates.

Besides the fuel oil restocking efforts, overall Chinese fuel demand is poised for recovery after recent data reinforced signs of a gradual rebound in China's economy.

"We believe that China will remain a net importer of fuel oil on an annual basis in years to come," Gorry said.

Still, China might more often turn net exporter in certain months ahead, he added, "especially in August when fuel oil imports are typically the lowest in the year."

China will release its oil import and export customs data for September in the week of October 22.

(Additional reporting by David Stanway in BEIJING; Editing by Florence Tan and Tom Hogue)