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Commodities

China's record fuel exports are bearish for oil markets: Russell

LAUNCESTON, Australia (Reuters) - - It’s tempting to view the growth in China’s crude oil imports this year as mainly a result of increased strategic stockpiling, but that overlooks the rising importance of refined product exports.

A worker examines a pumpjack at a PetroChina oil field in Panjin, Liaoning province June 30, 2014. REUTERS/Sheng Li

The stockpiling matters to crude oil markets as every barrel put into storage is ultimately positive for demand, as that barrel is effectively consumed insofar as it is taken out of the market.

However, every barrel refined in China and exported as fuel is simply a barrel that isn’t bought elsewhere, as Chinese exports compete and replace fuel produced in other refining centers, such as India, Singapore and the Middle East.

China’s crude oil imports were 6.65 million barrels per day (bpd) in November, taking the year to date level to 6.61 million bpd, up 8.7 percent on the first 11 months of 2014. [nL3N13W3I6]

However, product exports were a record 4.1 million tonnes in November, the first time they’ve been above the 4-million tonne mark. [nZZN07MB15]

Product exports in November were around 1.09 million bpd, based on the BP conversion factor of 8 barrels per tonne of product.

This took total product exports to 31.83 million tonnes for the first 11 months of the year, a jump of 18.6 percent over the same period in 2014 and equating to about 762,400 bpd.

More importantly, product exports are on a rising trend since the middle of the year, having been above 3 million tonnes every month since June, after averaging 2.34 million tonnes a month in the January to May period.

This implies that a rising share of China’s crude imports will simply be exported as refined fuel, especially when the changes being instituted by Beijing are taken into account.

POLICY CHANGES DRIVE EXPORTS

The government is increasingly liberalizing its trade in crude and fuels by allowing smaller refineries to buy their own crude and have access to fuel export quotas as well. [nL3N12U3S8]

If fuel exports of 762,400 bpd for the first 11 months of 2015 are subtracted from crude imports of 6.61 million, it means crude imports for domestic use are about 5.85 million.

For the first 11 months of 2014, crude imports minus fuel exports were about 5.46 million bpd, meaning that the actual increase of crude for domestic consumption has been about 390,000 bpd on a year-on-year basis.

The 390,000 bpd also includes oil flowing into strategic and commercial inventories, which may be about 125,000 bpd in 2015, based on calculations of how much storage has been commissioned as well as refinery run data.

What this does show is that China’s increase in crude demand for actual consumption has been modest, which fits in the with the overall picture of slowing economic growth.

But the consequence for oil markets is that China’s robust increase in crude imports this year isn’t nearly as strong as it looks, given the massive jump in exports of refined fuels.

On a net basis looking at crude imports minus fuel exports demand growth has been only 7.1 percent in 2015, far lower than the 8.7 percent growth when looking at just the crude imports.

While the detailed breakdown of November’s product exports won’t be available for another few weeks, based on October data, it appears the bulk of the increase in exports has been for diesel and jet kerosene, both middle distillates.

Diesel exports were up 49 percent in the first 10 months of the year to the equivalent of about 130,000 bpd, while jet kerosene shipments rose 14 percent to about 247,000 bpd.

Gasoline exports were also higher, rising by 8.75 percent to the equivalent of about 124,300 bpd.

With the trend to higher product exports firmly established and likely to continue given policy changes, export-orientated refiners in the rest of Asia will have to steel themselves for increased competition, which heralds the likelihood of pressure on margins.

While crude exporters may benefit from increased sales to China, in the absence of strong overall demand growth, it seems likely they will see sales to other Asian refining centers stagnate or decline.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Editing by Christian Schmollinger

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