Flow of unwanted oil from China set to turn into deluge

[SEOUL] The pace at which China exports the fuel it doesn't want is set to jump by more than four times in 2018, according to the nation's biggest energy producer.

That's a harbinger of bad news for processors in the rest of Asia - from South Korea to Japan and India - who now have to contend with higher crude prices as well as the threat of the flood dragging down refining margins. Government-issued quotas to sell oil products abroad may also expand this year in order to ease a large supply glut in the domestic market, an analyst at China National Petroleum Corp (CNPC) said on on Tuesday.

In particular, overseas shipments of diesel - also known as gasoil - are expected to soar 47 per cent to 23.8 million tonnes in 2018 from a year earlier, CNPC said in its annual report released in Beijing.

While surging demand for diesel - used to power everything from trucks to irrigation equipment and ships - has driven a rally in oil prices, the expected jump in exports from China may dilute the gains that can be made from selling the fuel in Asia. Profits from turning crude into gasoil in the region are near the highest level since 2015, enjoying a renaissance as inventories have shrunk.

The effect that China's fuel exports can have on margins was illustrated in 2015 when cargoes from the nation swamped the Asian market, dragging profits from making the fuel in the region to below US$8 a barrel and the lowest level in at least five years. The so-called crack spread was at US$15.60 a barrel as at 3.51pm Seoul time on Wednesday.

China's net oil-product exports - a measure that strips out imports - may climb about 31 per cent to 46.8 million tonnes this year, according to the CNPC report. Shipments rose about 7 per cent in 2017. While domestic apparent oil consumption will still rise 4.6 per cent to 615 million tonnes, the pace of growth will be slower than last year, according to the company.

That's because of factors including President Xi Jinping's pledge to focus on quality rather than quantity for economic growth, property market adjustments and stricter environmental-protection policies.

While China tightened its fuel export quotas in 2017 over concerns that excessive imports and overseas shipments of commodities may cause air pollution, it's likely to expand the allocations this year, said Li Ran, an analyst with CNPC's Economics & Technology Research Institute.

The government has traditionally used a quota system to manage outbound shipments, issuing regular allotments that specify sales volumes.

Other highlights from the annual report include: Net crude imports in 2018 may rise 7.7 per cent to 451 million tonnes, with an import-dependence rate of 70 per cent.

Oil-products demand may grow 1.9 per cent to 331 million tonnes in 2018 from a year earlier.

The country may add 36 million tonnes of new refining capacity this year, with crude processing rising 5.2 per cent to 598 million tonnes.

BLOOMBERG