(Repeats earlier story for wider readership with no change to
text. The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, Jan 31 (Reuters) - The profit
from producing diesel in Asia has been declining as Chinese
refiners increased exports to the region, but the looming
European ban on Russian refined fuels looms as a potential game
changer.
The margin, or crack, to produce a barrel of gasoil, the
building block of diesel, from Dubai crude at a typical
Singapore refinery dropped to $30.90 on Monday.
This was down from a recent peak of $38.89 a barrel on Jan.
25, but more importantly the crack has been dropping since
Chinese refiners boosted exports in the fourth quarter of last
year.
The profit margin on gasoil reached a fourth quarter peak of
$46.83 a barrel on Oct. 18, and it has slid 34% by the close on
Monday.
The drop coincided with a policy shift in China with the
authorities granting more quotas to export diesel and gasoline
as part of efforts to boost economic activity and allow refiners
to capture some of the high margins for refined fuels 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 Jan. 18.
This equates to about 675,000 barrels per day (bpd) and was
the highest since March 2021, and also more than double the
290,000 bpd shipped out in May, which was the weakest month in
2022.
While the increase in China's diesel exports have lowered
margins at other refineries in Asia for the transport fuel, it's
worth noting that even at the current level the crack remains
high by historical standards, having not traded above $20 a
barrel in the seven years from 2015 to 2021.
The question for the market is are margins for diesel and
gasoline going to continue to retreat as China maintains robust
exports, or will the European Union ban on imports of Russian
refined products, due to take effect on Feb. 5, lead to European
buyers competing for Asian cargoes.
It's worth noting that China's exports of refined fuels in
January are likely to be lower than those in December, with
Refinitiv Oil Research assessing 1.16 million tonnes, down from
December's 2.79 million.
The January figure is likely to rise once late-month cargoes
are added in, 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 will likely ramp up shipments of refined products
from February onwards.
Refiners in China and India can also withstand lower profit
margins better than other export-orientated competitors, such as
those in Singapore.
This is because they have been ramping up imports of cheaper
Russian crude, thus lowering their input costs.
In practical terms the Group of Seven nations price cap on
Russian crude and the EU's import ban have boosted the
profitability of Chinese and Indian refiners, while lowering
crude revenue for Russia and forcing a re-alignment of trade
flows.
RUSSIAN DIESEL
While the oil market has largely been able to work around
the exit of Russian crude from Europe by re-routing it to Asia,
it may be trickier to replicate this with the loss of Russian
refined products.
There is some scope for Russian diesel and gasoline to be
re-routed to Asia, but the increased freight cost and tanker
availability are likely to prove limiting factors.
The potential markets for Russian products are also likely
more limited, with Australia, Asia's biggest diesel importer,
unlikely to buy Russian fuel, even though it remains happy to
buy diesel and gasoline made from Russian crude at refineries in
India and China.
Some Asian fuel importers, such as Pakistan, the Philippines
and Indonesia, may be happy to buy Russian fuel, but the
discounts would have to be steep.
What's more likely is that Asia's diesel and gasoline
markets tighten as the EU ban on Russian fuel comes into effect.
Given that much of the region's spare refining capacity lies
in China, it's likely that China's exports will have to rise and
stay elevated to prevent refining margins, and thus retail fuel
costs, from rising sharply.
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GRAPHIC-China diesel exports vs gasoil crack: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Editing by Christian Schmollinger)
Messaging: clyde.russell.thomsonreuters.com@reuters.net))
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