China to offer Europe a lifeline this winter with more diesel exports

China exported an average of two million tonnes of diesel a month before petroleum export curbs in July 2021. PHOTO: REUTERS

SINGAPORE - China's refiners are set to release huge stocks of diesel onto the world market just in time to meet winter demand, according to industry sources.

Refinitiv, a unit of the London Stock Exchange Group, said Beijing has granted refiners up to 15 million tonnes of oil product quotas for the rest of the year, partially reversing an export ban imposed last year.

Mr John Driscoll, managing director of consultancy JTD Energy Services, said any expanded exports from China would provide relief to a jittery market facing tight supplies ahead of winter.

"If China goes ahead with expanding its diesel exports, it will be viewed as a positive and constructive move for market," he added.

"Other regional refiners might not be too pleased because the additional supplies will soften the market outlook, but consumers will not be complaining."

Mr Yaw Yan Chong, director of oil research at Refinitiv, said most of the new export quotas would be for diesel, used commonly as heating fuel and power generation.

He noted that China exported an average of two million tonnes of diesel a month before petroleum export curbs that came into effect in July last year restricted shipments to around 525,000 tonnes a month.

While Beijing has not officially made an announcement on the quota, Mr Yaw said he expects diesel exports to revert to pre-clampdown levels in the months ahead.

Beijing manages exports of refined products using a quota system, issuing several batches of allocations over the course of a year. It uses calibrates product shipments to global markets to manage domestic supply and demand.

Refinitiv data also shows that the fresh quotas would bring total oil product exports by China for the year to 39 million tonnes, up 4 per cent from 2021.

Mr Yaw said the move to expand exports was unprecedented, especially as recent policy in the world's second-largest economy has been to curb excessive domestic refinery production amid a broad plan to reduce carbon emissions.

He noted that the policy had cut exports of refined petroleum products like gasoline, diesel and jet fuel over the past year because China's nationally run refiners had to fill the vacuum left by private refiners and meet domestic demand.

"We believe that most of this export quota will be for diesel and that it is driven by the Chinese refiners wanting to cash in on the strong international margins for the product in the face of poor domestic demand due to months of widespread pandemic-enforced lockdowns in the country," he said.

Diesel is widely used as heating fuel in the northern hemisphere in winter but supplies this year have been under severe pressure because of the conflict between Russia and Ukraine.

Price-reporting agency Quantum Commodity Intelligence expects any increased exports from China will make their way west.

"It increases the likelihood that Asian volumes will head into the European market, where supply has tightened considerably since the Ukraine war. Spreads are likely to stay wide for some time as Europe seeks to replace Russian oil products after European Union sanctions begin in February."

Diesel margins, or the profits a refinery makes for producing the distillate fuel, were trading around US$45 a barrel in mid-September but had weakened to around US$35 a barrel as at Friday's Asian market open.

Around half of Russia's petroleum product exports went to Europe before the Ukraine war, noted the International Energy Agency (IEA), but stinging sanctions imposed by Western powers on Moscow's energy shipments have caused severe supply disruptions and sent fuel and electricity costs to historic highs.

The impact is reverberating globally as European states scour the world for alternative supplies.

In Europe, gas-to-oil switching for power generation has added to the usual seasonal demand for winter fuel.

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