LAUNCESTON, Australia (Reuters) - China’s refiners increased their output in July to close to 12 million barrels per day (bpd), but at the same time exports of refined fuels fell to the lowest in four months.
These facts may seem contradictory, and while there are several issues than can help explain the dynamics, perhaps the most compelling is that China appears to be becoming more attuned to market forces for refined products in Asia.
As is often the case with China’s intake and processing of crude oil and its exports of refined products, the data is incomplete, and in this case the main missing numbers are movements in inventories.
Inventory data was last released in April, so it’s hard to know how much of the refinery throughput went into storage tanks, as opposed to being exported or consumed domestically.
But what is known is that refinery runs totaled 11.95 million bpd in July, a gain of 11.6 percent from the same month in 2017.
In the first seven months of the year China’s refineries processed 12.07 million bpd, an increase of 9.2 percent over the same period last year.
However, exports of gasoline fell to 890,000 tonnes in July, equivalent to about 244,000 bpd, down from 334,000 bpd in June and 403,000 bpd in May.
Diesel exports fell to 1.54 million tonnes, or about 372,000 bpd, down from 402,000 bpd in June and 484,000 bpd in May.
In addition to the unknown flows into inventories, gasoline and diesel exports may have been affected by Chinese refiners getting close to exhausting quotas and cutting back on shipments.
It is also possible that the smaller, independent refineries exported less because of reduced runs, as they battle higher crude oil prices and increased government scrutiny on taxes.
Chinese domestic consumption may also have risen, especially in the agricultural sector given the summer peak demand season.
All of these factors can help shed light on the drop-off in China’s exports of refined fuels, but perhaps the best explanation is the movement of prices around the time when July exports would have been arranged.
The profit from making a barrel of gasoline in Singapore from Brent crude, the main regional benchmark, dropped to its low so far this year of $3.38 a barrel on July 4.
It had been steadily declining since hitting a peak of $9.91 a barrel on May 22, meaning that at the time Chinese refiners would have been contemplating selling gasoline for exports, the incentive to do so was weakening.
It’s a similar story for diesel, with the profit margin, or crack, for producing a barrel of 10 parts per million diesel from Dubai crude dropping to a low of $12.97 a barrel on June 27, down from $16.64 on May 18.
The moves in pricing suggest that Chinese refiners may have become more price sensitive, and therefore less likely to export surplus refined fuels irrespective of the profit gained from doing so.
What is also worth noting is that the cracks for both diesel and gasoline later strengthened, with diesel rising to $16.33 a barrel on Aug. 24, before slipping slightly to end at $16.06 on Monday.
The gasoline crack jumped 240 percent from its July low to $11.55 a barrel on Aug. 15, although it subsequently eased to $8.21 on Monday.
The recovery in the profit margins for refined fuels may have come too late to provide a significant boost to China’s exports in August.
But September should reveal whether China’s refiners are indeed becoming more price-sensitive, or whether the other factors still play a bigger role.
Editing by Richard Pullin