China may close the year with record shipments of key transportation fuels in December as refiners rush to use their export quotas and maximize overseas profits to compensate for tepid domestic fuel demand caused by COVID-related curbs.
December exports of diesel, gasoline and aviation fuel combined are estimated at 6.5 million to 7.1 MMt, led by diesel shipments that could reach 3 MMt, according to estimates from Chinese consultancy Longzhong and JLC, Refinitiv Oil Research and several trading sources.
China’s diesel exports hit an all-time high of 2.83 MMt in March 2020, followed by a record 6.5 MMt in April for all three products, according to Chinese customs data.
Bumper shipments from China will weigh on Asian refining margins, particularly for diesel, as refiners’ profit from producing the fuel from Dubai crude has already shed 15%-30% month-on-month amid sufficient regional supplies and a closed arbitrage to European markets.
Beijing’s abrupt relaxation of COVID rules this week aren’t likely to reverse the outflows as substantial recovery in local demand may take months to materialize, market participants said.
Despite earlier expectations that part of the large set of quotas released in October could be extended into 2023, it became clear in recent weeks that refiners were being encouraged to finish them all by end-December, three trading sources said.
“Chinese refiners are still grappling with high domestic inventories, especially for gasoline and more recently gasoil,” said Daphne Ho, senior analyst at consultancy Wood Mackenzie.
“Healthier export margins has been a key push factor.”
State refiners, which control most of the export quotas, have since November been ramping up diesel production to cash in lucrative overseas sales.
Despite recent declines, refining profits for both 10 ppm sulfur gasoil and jet fuel have more than doubled this year on tight global supplies.
“State majors are very much margin-oriented, and they will only redirect volumes if there is better profit elsewhere,” said one China-based trading source.
Gasoline exports were pegged at 2.1 MM to 2.3 MMt for December, likely to surpass a record 1.9 MMt from April 2020.
It’s still not clear how Beijing will map out its 2023 fuel export policy, caught between a long-term goal to reduce emissions and a need to boost sagging exports, traders said.
Export volumes for January could swing either way, pending fresh export quotas for 2023 and how fast China’s demand recovers in response to the sweeping changes in COVID policy.
“Demand seemed to be bottoming out, but it may take months to see them return to pre-COVID levels especially for jet fuel and gasoline,” said a second China-based trading source.
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