-Clyde Russell is a Reuters columnist. The views expressed are
By Clyde Russell
LAUNCESTON, Australia, July 29 China's
refineries produced the most fuel on record in June and oil
consumption reached the highest in 17 months, but there are
still doubts as to the true strength of demand.
Crude throughput totalled 10.18 million barrels per day
(bpd) in June as refineries returned from maintenance and new
plants ramped up to full production.
This was a 7 percent gain from May and 5.8 percent higher
than June last year, according to data from the National Bureau
Implied oil demand reached 10.2 million bpd in June, the
highest level since January last year.
Implied demand is calculated by adding net fuel imports (or
subtracting net exports as has been the case several times this
year) to refinery throughput. The weakness with this is that it
doesn't take account of changes in commercial and strategic
stockpiles, data for which isn't available.
However, strong crude imports in the first half of the year,
coupled with modest refinery throughput in the first five
months, supported the view that China was once again filling
However, it's likely that the flow into tanks has ended, at
least for now, with crude imports slowing and refinery runs
Crude imports in June were 5.66 million bpd, down 7.8
percent from May and lower than the first half average of 6.13
Overall, the numbers appear to be painting a picture of a
nascent recovery in fuel demand, which would be in line with
some signs of a rebound in economic growth, with the HSBC/Markit
Flash Manufacturing Purchasing Managers' Index rising to an
18-month high in July.
GASOLINE STRENGTH, DIESEL WEAKNESS
But the numbers mask different situations for the various
refinery products, with the strength in domestic demand being
concentrated in gasoline, and not in gasoil, or diesel, which is
the fuel more usually associated with economic growth given its
role in transportation, manufacturing and construction.
Total vehicle sales are up 8.4 percent in the first six
months of the year, but more importantly for gasoline is the
11.2 percent jump in passenger car sales, given that Chinese
buyers overwhelmingly choose gasoline over
The breakdown of refinery output shows that gasoline output
rose 9.5 percent in the first half from the same period in 2013,
while diesel only gained 0.15 percent..
This shows that refiners are trying to maximise their
gasoline yield, and even among the middle distillates, kerosene
is preferred, given output of the jet and heating fuel rose 21
percent in the first half.
It's likely that if the Chinese economy does post stronger
growth in the second half of 2014 that diesel demand may
improve, but in the next few months it's equally likely that
Chinese refiners will have too much diesel on their hands.
This raises the possibility of increased exports of the
fuel, which would fit in with recent trends.
China exported 476,406 tonnes of diesel in June, equivalent
to about 119,101 bpd. This exceeds the average of the first six
months of 87,000 bpd, according to customs data.
While customs has changed the categorisation of diesel this
year, exports of what was then termed "light diesel" totalled
1.74 million tonnes in the first half of 2013, or about 72,099
This means that so far in 2014 diesel exports have jumped
about 20 percent, while jet kerosene exports have gained 6
percent and gasoline exports have declined 9.8 percent.
It's therefore not surprising that Asian diesel, or gasoil,
prices have declined relative to crude oil, with
Singapore-traded gasoil's premium, or crack, to Dubai crude
at $13.48 a barrel on July 25.
This is up from the 2014 low of $12.99 a barrel on June 30,
but is also well below the peak of $19.16 on April 2.
There is a fairly strong inverse correlation in the past two
years between Chinese diesel exports and the gasoil crack, as
shown by this graphic. (reut.rs/1k562wv)
Soft demand for diesel in Europe is also keeping excess
Asian supply in the region, meaning the profit margins on
producing the fuel are likely to remain under pressure.
While this may lead to some refiners, such as those in South
Korea, curtailing runs, it's still likely the market will remain
in surplus until China's diesel demand catches up to domestic
(Editing by Himani Sarkar)