Refining margins in Asia have dropped in recent weeks as China ramped up exports of fuels amid high export quotas assigned to its refiners in recent months.
The profit margins of processing diesel are still at high levels historically, and they could start rising again once the EU embargo on seaborne imports of Russian fuels comes into force on February 5.
For example, the profit margin for gasoil, the key component of diesel, from processing Dubai crude at a Singapore refinery fell by 34% from its fourth-quarter peak of $46.83 per barrel in the middle of October to $30.90 earlier this week, per estimates by Reuters’s Asia Commodities and Energy Columnist Clyde Russell.
Going forward, the profit margins for fuels in Asia will reflect two opposing trends—the bearish one of potentially higher Chinese fuel exports and the bullish one of Europe potentially competing for diesel and other products from Asia in the absence of Russian fuel imports.
Chinese exports of fuels jumped in December, with gasoline sales abroad matching an October 2020 record, following a huge export quota the authorities issued to refiners at the end of 2022.
Exports of gasoline hit 1.91 million tons in December, hitting the record level seen in October 2020, while diesel exports rose to the highest level since March 2021, at 2.79 million tons, per official Chinese data.
The high export levels in December were the result of the biggest batch of fuel export quotas issued for 2022 by authorities. China allocated 15 million tons of new fuel export quotas to its major refiners at the end of September. Exports were also high due to the still weak domestic demand as China started to ease in December the ‘zero Covid’ policy which led to a surge in infections.
China’s fuel exports in January, however, could be much lower than in December as refiners looked to stock up on gasoline and diesel for domestic demand around the Lunar New Year on January 22, and meet expectations of rising demand at home after the Covid restrictions were lifted, analysts say.
Nevertheless, China’s reopening and the higher fuel export quotas allocated in the first batch of 2023 look bullish about Chinese demand and fuel exports in the coming months.
Refining margins in Asia could go higher if Europe – scrambling to replace Russian fuels after February 5 – turns to more supply from Asian refiners.
“Once the EU embargo on Russian seaborne fuel exports kicks in we are likely to see prices for gasoline and especially diesel remain supported by tightening supply,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said in an analysis last week.
“Russia may struggle to offload its diesel to other buyers with key customers in Asia being more interested in feeding their refineries with heavily discounted Russian crude, which can then be turned into fuel products selling at the prevailing global market price,” Hansen added.
A shortfall seems likely for diesel despite the potential for more supply from the United States and the Middle East, he noted.
“A shortfall seems likely, not least considering the prospect for a strong recovery in China leading to lower export quotas,” Hansen said.
The expected rebound in jet fuel demand, in turn, is likely to pressure diesel yields, “creating another layer of support for distillate cracks on either side of the Atlantic,” according to the strategist.
There are a lot of uncertainties regarding Russian fuel supply in the coming months, the key being whether Russia can place the barrels displaced from Europe elsewhere, and whether a planned price cap on Russia’s fuels would work as intended. The European Union was considering setting a $100 a barrel price cap on Russian diesel to limit the potential fallout on global supply after the EU ban on Russian refined products comes into effect on February 5. Days before the EU ban is set to kick in, the EU is still at odds over a cap on the price of Russian diesel and other products.