Column: Refining squeeze is driving Asia's record diesel prices. Blame China

4 minute read

A worker walks past oil pipes at a refinery in Wuhan, Hubei province March 23, 2012. REUTERS/Stringer

Register now for FREE unlimited access to

LAUNCESTON, Australia, June 15 (Reuters) - There is one country that could do much to relieve the current high retail prices of diesel and gasoline in Asia, but so far it's showing no signs of doing so. China.

The world's biggest crude oil importer is also home to much of the spare refining capacity in Asia, and it has the ability to process additional crude and export refined products.

But China has largely stepped away from exports of refined fuels such as diesel and gasoline this year, and shows little sign of resuming its previous levels of shipments any time soon.

Register now for FREE unlimited access to

China only allows exports of refined products under official quotas, mainly granted to large state-owned refining companies and not to the smaller independent companies where much of China's spare refining capacity is held.

A further 4.5 million tonnes of export quotas were issued last week, bringing the total so far for 2022 to 17.5 million tonnes.

However, this is 41% lower than the 29.5 million tonnes issued in the first tranche last year, and this lack of export quotas is showing up in China's official data for fuel shipments.

China exported 3.27 million tonnes of refined products in May, down 40% from the same month a year earlier. For the first five months of 2022, refined fuel exports are 38.5% below the same period in 2021. read more

The breakdown by fuel type for May's product exports will be released later in June, however, Refinitiv Oil Research said diesel exports were just 230,000 tonnes, or just 55,600 barrels per day (bpd) in May, down massively from the official figure of 406,000 bpd in May last year.

China's exports of gasoline were higher, with Refinitiv estimating about 268,700 bpd in May, but this was also down from about 425,000 bpd in May last year.

The issuance of some new quotas may lead to a small increase in exports in June and July, but without the smaller independent refiners being able to participate, it's unlikely that China's shipments will recover to anything close to the levels of 2021.

The absence of Chinese cargoes has helped drive the profit margin for diesel to record highs, with a typical refinery in Singapore making a margin of $60.57 a barrel on Tuesday on producing 10 ppm gasoil , the building block for diesel.

The profit margin on diesel has doubled since the recent low of $31.79 a barrel on May 19, and is also 365% higher than where it was at the end of last year.

China diesel exports vs gasoil crack


The profit margin, or crack, on producing gasoline in Singapore has also performed strongly this year, ending at $28.44 a barrel on Tuesday, about 155% up from the $11.14 at the end of 2021.

However, the gasoline crack has eased somewhat from the record high of $37.27 a barrel on May 20 as high retail prices across much of Asia have dampened demand for the fuel mainly used for light vehicle transport.

It's worth noting that not all refined fuels are showing such strong margins. The crack for producing naphtha , the light distillate mainly used to make petrochemicals, is currently at a loss of $120.08 a tonne, which is a loss of about $13.49 a barrel.

This is the steepest loss for making naphtha since the 2008 global financial crisis and is a reflection of weak demand for the feedstock in major consumer China amid excess supplies as refiners elsewhere try to maximise crude throughput in order to boost output of the profitable fuels such as diesel and gasoline.

Overall, the data is indicating that the problem in Asia's fuel markets is not one of a lack of crude oil, it's more a lack of spare refining capacity, still strong demand for diesel and a sharp decline in refined products from China.

Given China doesn't appear likely to increase fuel exports substantially in coming months, high prices for refined fuels are likely to persist until the point of demand destruction.

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

Register now for FREE unlimited access to
Editing by Richard Pullin

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Thomson Reuters

Clyde Russell is Asia Commodities and Energy Columnist at Reuters. He has been a journalist and editor for 33 years covering everything from wars in Africa to the resources boom and its current struggles. Born in Glasgow, he has lived in Johannesburg, Sydney, Singapore and now splits his time between Tasmania and Asia. He writes about trends in commodity and energy markets, with a particular focus on China. Before becoming a financial journalist in 1996, Clyde covered civil wars in Angola, Mozambique and other African hotspots for Agence-France Presse.