-Clyde Russell is a Reuters columnist. The views expressed are his own.-
By Clyde Russell
LAUNCESTON, Australia, July 29 (Reuters) - 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 of Statistics.
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 strategic storage.
However, it’s likely that the flow into tanks has ended, at least for now, with crude imports slowing and refinery runs increasing.
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 million bpd.
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.
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 diesel.
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 bpd.
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 refinery production. (Editing by Himani Sarkar)