China is swing factor in diesel’s global squeeze
(Reuters Breakingviews) - Vladimir Putin is flexing his diesel muscles, but Xi Jinping’s look bigger. The Russian president’s recent decision to ban diesel exports is one of the reasons why prices of the industrial and heating fuel could go higher after soaring 30% since the end of June. As demand enters peak season, Xi’s ability to dictate how much Chinese oil companies export looks like the key swing factor.
Globally, demand for diesel and gasoil is around 28 million barrels per day (bpd), according to the International Energy Agency. Even before Putin’s intervention, the market was tight. Saudi Arabia’s crude production cuts curbed the medium sour supply of the commodity used to make diesel. A hot summer and refinery outages in the U.S. and elsewhere reduced refining capacity around the world too. Stocks in major consuming regions from the U.S. to Singapore were severely depleted in August and sit below their 10-year season averages. And while crude prices have fallen back to $85 a barrel since exceeding $96 a barrel in late September, as traders fret that higher borrowing costs might hit economic growth, El Niño may see a colder Northern Hemisphere winter push diesel demand even higher.
At first sight, China’s influence isn’t obvious. Of the world’s 8 million bpd export flows, Russia exported on average 1 million bpd in the nine months to September, according to consultancy Vortexa. China only exported 250,000 bpd in the same period, as the government restricted export volumes.
Even so, China last year overtook the United States as the world’s biggest refiner, with total refining capacity of 18.4 million bpd. Chinese diesel inventories have risen 11% from January as domestic usage fell, but exports rose from a low 2022 base as margins achievable by selling overseas soared, according to consultancy Longzhong. At 820,000 bpd, year-to-date quotas are now higher than last year and only 30% below the record level in 2020.
Xi has further firepower. Additional quotas could make Chinese diesel exports balloon to 750,000 bpd in November and December, according to calculations by Breakingviews and Energy Aspects analyst Jianan Sun. An additional 375,000 bpd to 500,000 bpd would be more than enough to balance supplies in Europe over the winter months, where shortages are likely to be more like 250,000 bpd.
If the arbitrage remains lucrative and Chinese demand stays muted, further exports could bring additional revenue that supports the weakening yuan and incentivizes refineries to increase production and boost economic output. In theory, China has around 4 million bpd of spare refining capacity, which could translate into 1.2 million bpd of additional diesel supply, Sun reckons – enough to offset even a complete cessation of Russian exports.
Xi may yet be wary of shrinking China’s strategic oil reserves, while a refining splurge would increase emissions. If China’s state planner sticks with an embargo on new quotas until January, Chinese refineries would also probably exhaust what they can export by the end of October. That would limit Chinese exports to below 400,000 bpd, according to Vortexa, adding to tightness elsewhere. Still, diesel watchers should be watching Beijing as closely as Moscow.
The Chinese government has told the country’s major oil refiners not to expect any more fuel export quotas this year, Bloomberg reported on Sept. 28 citing people with knowledge of the matter.
Russia had announced on Sept. 21 that it had temporarily banned exports of gasoline and diesel to all countries outside a circle of four ex-Soviet states with immediate effect, in order to stabilize the domestic market. Since then, Moscow has made some changes to its fuel export ban including lifting restrictions on fuel used as bunkering for some vessels and on diesel with high sulfur content, Reuters reported on Sept. 25 citing a government document.
Prices of Brent crude have fallen from nearly $97 a barrel on Sept. 27 to trade at $85 a barrel on Oct. 5.
Comments