Asia diesel profit margin to tango with China exports, Russian ban: Russell
(The opinions expressed here are those of the author, a columnist for Reuters.)
LAUNCESTON, Australia: Profits from diesel production in Asia have declined as Chinese refiners increased exports to the region, but the looming European ban on Russian refined fuels is a potential game changer.
The margin, or crack, to produce a barrel of gasoline, the building block of diesel, from Dubai crude at a typical Singapore refinery fell to $30.90 on Monday.
That was down from a recent high of $38.89 a barrel on Jan. 25, but more importantly the crack has fallen since Chinese refiners boosted output in the fourth quarter of last year.
The profit margin on gasoline reached a fourth-quarter high of $46.83 a barrel on Oct. 18, and it had fallen 34% by Monday’s close.
The drop coincided with a policy shift in China with authorities granting more quotas to export diesel and gasoline as part of efforts to boost economic activity and allow refiners to use some of the high margins for refined capturing fuel in Asia.
China’s diesel exports rose for a second month in December, hitting 2.79 million tonnes, up 32.8% from November’s 2.10 million, according to official data released on January 18.
This equated to around 675,000 barrels per day (bpd) and was the highest since March 2021, and also more than double the 290,000 bpd shipped in May, which was the worst month in 2022.
While the rise in China’s diesel exports has reduced margins at other refineries in Asia for the transportation fuel, it is worth noting that even at current levels, the crack remains high by historical standards, having traded at no more than $20 a barrel in the seven years from 2015 to 2021.
The question for the market is whether diesel and gasoline margins will continue to shrink as China maintains robust exports, or whether the European Union’s ban on imports of Russian refined products, which takes effect on February 5, will lead to that European buyers compete for Asian cargoes.
It is worth noting that China’s exports of refined fuel in January are likely to be lower than those in December, with Refinitiv Oil Research estimating 1.16 million tonnes, down from December’s 2.79 million.
The January figure is likely to rise once late-month loads are added, but the final figure is still on track to be well below the December number.
However, Chinese refiners still have plenty of export quotas available and are likely to increase shipments of refined products from February.
Refiners in China and India can also withstand lower profit margins better than other export-oriented competitors, such as those in Singapore.
This is because they have increased imports of cheaper Russian crude, thus lowering their input costs.
In practical terms, the Group of Seven countries’ price cap on Russian crude and the EU’s import ban have boosted the profitability of Chinese and Indian refineries, while lowering crude revenues for Russia and forcing a realignment of trade flows.
While the oil market was largely able to circumvent the exit of Russian crude from Europe by diverting it to Asia, it may be more difficult to replicate this with the loss of Russian refined products.
There is some scope for Russian diesel and petrol to be diverted to Asia, but the increased freight costs and the availability of tankers are likely to be limiting factors.
The potential markets for Russian products are also likely to be more limited, with Australia, Asia’s biggest diesel importer, unlikely to buy Russian fuel, even though it is happy to supply diesel and petrol made from Russian crude at refineries in India and China. for sale.
Some Asian fuel importers, such as Pakistan, the Philippines and Indonesia, may be happy to buy Russian fuel, but the discount would have to be high.
What is more likely is that Asia’s diesel and gasoline markets will tighten as the EU ban on Russian fuel takes effect.
Given that much of the region’s spare refining capacity lies in China, it is likely that China’s exports will need to rise and remain elevated to prevent refining margins, and thus retail fuel costs, from rising sharply.
(Editing by Christian Schmollinger)