A Chinese diesel crunch | FT Alphaville

A Chinese diesel crunch

If you were wondering why distillate spreads improved over the last month in Europe, apparently there has been a unique demand situation heading over from Asia — prominently China — as well as Latin America.

KBC Energy Economics weekly oil comment on Monday notes, for example, how shortages of diesel in China have been bleeding through into the overall global supply picture:

Diesel shortages are sweeping through Chinese cities this month while demand for the middle of the barrel has also jumped in Latin America.

In the US, weekly data is showing rising requirements for distillates ahead of the winter while the Mediterranean market has raised the alarm about the supply of 10 ppm fuel as Turkey prepares to switch to low-sulphur specs early next year. Despite the improved cracks that have resulted, however, we still believe that the inventory overhang means it is too early to relieve pressure on OECD refiners.

China’s shortages are linked to power shortages initiated by some local authorities’ attempts to limit electricity supply to save energy. Power cuts have resulted in factories looking for diesel-generators to make up for the shortfall. This has resulted in diesel scarcity in several parts of China.

Sinopec, the country’s largest refiner, is about to import as much as 200,000 tonnes of diesel after buying 80,000 tonnes earlier in November while Petrochina, the second largest refiner is planning to import 35,000 tonnes soon. Both companies are boosting their refinery runs to a new record level to tackle diesel shortages. Although China’s diesel pain might persist until next year, Asia’s new state-of-the-art refineries have the capacity and the capability to meet an upsurge in Chinese demand.

And this was JBC Energy’s view on the same topic:

Refinery margins in Asia proved to be much stronger over the last week. After a peak of around $4/bbl, Singapore cracking margins managed to remain in the $3-$4/bbl bandwidth, while cracking margins in NW Europe and the Mediterranean partly dropped by $2/bbl. The fundamental strength of the Asian market, seen in strong crude buying interest from China, Japan and India together with a bullish product demand outlook (emerging tightness of diesel in China as the winter approaches as well as South Korean crackers running on full-capacity) is the major reason behind this development.

Olivier Jakob over at Petromatrix, meanwhile, commented on Monday that China was still struggling to resolve its shortage of diesel and was further curbing exports of distillates.

The European gasoline crack (heating oil’s premium over the price of gasoline) has consequently remained bolstered:

Goldman Sachs also had a view on the subject on Monday — predicting the demand surge could end up being a key factor in driving Chinese petroleum demand in the next quarter (our emphasis):

In our last Energy Weekly (see GS Energy Weekly: China crude oil imports fall, but demand likely strengthens, November 10, 2010), we highlighted the apparent diesel shortage in China as enterprises switch to diesel-fired generators in order to compensate for cuts in electricity supply. In an effort to comply with regional energy efficiency targets stipulated in the 11th Five-Year Plan that ends this year, many regional governments have cut electricity supplies to their high energy consumers. Based on new reports about plans from the two largest Chinese refiners, Sinopec and PetroChina, to ramp up crude throughputs to new record levels in order to produce more diesel, we forecasted that total Chinese petroleum consumption would grow by 950-1100 thousand b/d year-over-year in October and November.

Since then, production data for October has been published by the China National Bureau of Statistics (CNBS), which points towards demand growth of close to 1 million b/d year-over- year. According to news reports, China International United Petroleum & Chemicals Co (UNIPEC), the trading unit of Sinopec, plans to import 120,000 tons of diesel for December delivery, compared to 80,000 tons in November.

Further, diesel exports might drop to as low as 2.5 thousand b/d in November. We therefore remain confident in our forecast that total petroleum demand will grow further month-over-month in November as Chinese diesel demand will remain exceptionally high until the 11th Five-Year Plan expires at the end of the year and diesel stocks have been replenished.

The curious thing about all of this , though, notes Jakob, is that spreads are rising despite an environment of global spare upstream capacity and historically sizeable inventories in both diesel and heating oil.

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