--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Nov 26 A little heralded
change to China's crude import rules may have a much greater
impact on Asia's fuel oil market next year, further depressing
margins for the residue.
China National Chemical Corp., one of the operators of the
small refineries known as teapots, may be granted a licence to
directly import crude oil, according to industry sources.
If this happens, it may help break the stranglehold on
China's crude import market held by the big three of PetroChina,
Sinopec and CNOOC.
ChemChina may get a quota to bring in about 10 million
tonnes of crude in 2013, equivalent to about 200,000 barrels per
This would not be enough to meet all of ChemChina's needs,
given it has about 500,000 bpd of refining capacity, but similar
to most teapots, it seldom runs its units at anything near
capacity, because of weak margins.
The teapots suffer from having to import fuel oil to use as
feedstock or buy crude from the majors at higher prices, which
depresses their profits and often leaves utilisation rates
languishing at less than 50 percent.
Teapots have a total refining capacity of about 2 million
bpd, or just under one-fifth of China's total, so any move that
allows them to boost their operating rate is significant.
On the surface, it appears possible that ChemChina could
replace about 200,000 bpd of fuel oil imports with crude.
But according to JPMorgan's commodities research team,
ChemChina's three biggest refineries will process about 80,000
bpd of offshore crude and 60,000 bpd of imported fuel oil in
However, ChemChina may well choose to boost its run rates if
it does get access to cheaper, direct crude imports, so the
chances are China's imports of crude will rise and those of fuel
oil will decline.
The gain in crude imports won't be enough to significantly
alter the overall supply-demand balance, but the impact could be
more pronounced in the fuel oil market, given China's current
status as a major buyer.
China's net imports of fuel oil have been easing recently,
but were still 259,493 bpd in October, down 10.3 percent on the
The 12-month moving average stood at 258,041 bpd in October,
accounting for the bulk of the net product imports of 341,237
bpd over the period.
It's probably too much to assume that fuel oil imports will
drop by the full 200,000 bpd quota under consideration for
ChemChina, but even a decline in the region of 100,000 bpd would
be felt in Asian product markets.
Fuel oil's discount to Dubai crude has been on a declining
trend since June and stood at $11.47 a barrel on Nov. 23.
The discount fell as low as 57 cents in June as fuel oil
demand rose for power generation during summer in the Middle
East and Western sanctions against Iran cut shipments of the
residue to Asia.
Slower Chinese demand for fuel oil, particularly in August,
when teapot refineries were struggling to make profits, also
helped widen the discount to crude.
PRESSURE ON FUEL OIL CRACK
Any erosion in Chinese demand will put further pressure on
the fuel oil crack, especially at a time when demand from other
sources, such as the shipping industry, is muted.
And fuel oil isn't the only product that may be affected if
ChemChina, and perhaps other teapot refiners, are allowed to
directly source their own crude.
It's possible that increased refinery runs in China will
increase the surplus of fuels, which could put pressure on the
authorities to allow more exports of refined products.
China was a net exporter of 25,816 bpd of diesel in October,
well up on the 12-month moving average of 2,795 bpd, and 61,040
bpd of gasoline, slightly below the 12-month figure of 65,936
This is likely because refinery runs rose in October to 9.4
million bpd, up from the 12-month average of 9.12 million bpd,
as units returned from maintenance and new ones started.
While fuel demand is likely to gain in the next few months
as China's economy regains some momentum, it's possible that
this will be exceeded by gains in refining output.
This means refiners elsewhere in Asia face the prospect of
China buying less of their fuel oil as well as greater exports
of gasoline and diesel by China into the region.
(Editing by Clarence Fernandez)