The move by China to suspend diesel shipments, which the country’s state planning body said was to conserve domestic oil product supply, should support Asian diesel cracks that have fallen sharply from April on a resumption of Japanese exports.
China’s oil demand hit its third highest ever in April, and diesel consumption is expected to surge further in the summer months as China’s worst power shortages since 2004 start to bite.
“I think the NDRC notice was related to the diesel shortages during the spring plowing period over the past two months, but it is more about the forthcoming power shortages this summer,” said an oil trader with a western trading house.
“The two Chinese oil majors have stopped diesel exports over the past month. The notice could imply that China could potentially import some diesel if energy shortages continue.”
Electricity shortages have emerged in eastern and southern China well before the peak summer season, with utilities unwilling to operate at full capacity because they are unable to pass on rising coal costs.
Traditionally, factories in eastern and southeastern China use their own diesel-fired generators to keep running during power crunches.
The International Energy Agency (IEA) said in its monthly oil report on Thursday that the electricity shortages could potentially add as much as 300,000 bpd to gasoil demand.
China will also increase imports of petrochemical feedstock, the National Development and Reform Commission (NDRC) said, implying higher purchases of naphtha.
The suspension, which was “in principle,” does not apply to Hong Kong and Macau, according to the notice issued on the NDRC website.
In principle generally means the government cannot give a 100 percent guarantee that all exports will end.
Asia’s largest refiner Sinopec said last month it had already stopped exports of oil products and would continue cutting supplies to Hong Kong and Macau.
Rival PetroChina has also significantly reduced exports of oil products over the last month, industry sources have said.
Refineries have been stepping up output to ensure domestic supplies, shrugging off soaring crude prices to feed demand that grew by 8.8 percent on the year in April, after six consecutive months of double-digit gains.]
China’s diesel output in April rose 9.8 percent from a year earlier to 13.95 million tons, or 103.2 million barrels.
Despite this growth in domestic demand China has remained a net exporter of diesel. It shipped 63,000 bpd of light diesel fuel in March, down 44 pct from a year earlier, with net exports at 40,170 bpd.
In the first quarter, exports of light diesel fuel fell by 58 percent to 522,073 tons, or 3.86 million barrels. April export figures will come out later this month.
China became a brief net diesel importer in December and January after China’s power consumption crackdown late last year led to a spike in diesel demand.
Lower Chinese exports, and especially net imports, will underpin diesel cracks.
The margin for processing Middle East Dubai crude into gas oil, or the crack spread, plunged by almost 30 percent in the three weeks after hitting a 30 month-peak of $24.02 a barrel on April 11, as expectations of lower Japanese shipments following an earthquake failed to materialize.
“We expect gas oil to remain strong this year with China limiting exports,” said Wood Mackenzie senior downstream analyst Sushant Gupta.
The NDRC also called on refineries to run at high rates and increase output of oil products, and urged local regulators to crack down on hoarding and price speculation.
China’s two biggest oil firms have been urged to crank up supplies despite suffering heavy refining losses since the beginning of this year.
They are likely to suffer even more through the loss of export revenues, where prices aren’t controlled like they are in the domestic market, and analysts suggested the government is likely to once again compensate the companies for their losses.
“The central government is likely to use other tools — including direct payments to the country’s major refining companies — to ensure sufficient domestic fuel supplies,” said Soozhana Cho, head of commodities research at Deutsche Bank.
