China's quest to keep more oil barrels at home to limit product exports in 2023

China's much anticipated oil demand revival will likely prompt the country to keep more barrels at home this year -- a trend that could lead to a slump in clean oil product exports from Asia's biggest oil consumer toward the later part of 2023, sources told S&P Global Commodity Insights.

Although Chinese refiners are holding plentiful export quotas now, analysts and industry sources said Beijing could do another U-run and put a lid on exports if domestic demand picks up. Any shortfall in cargoes from China at a time when the products market is bracing for an EU ban on Russian product exports may lift oil product cracks.

"China's exports will become a wild card in 2023, on top of the upcoming price cap on Russia's oil products, which are set to reshape global trade flows," said Shu Zhang, an analyst with S&P Global.

Beijing has been encouraging product outflows as a tool to drive up its struggling economy, which is reflected in the 68.2% year-on-year increase in clean oil product export quota availability during the first batch allocation for 2023. Outflows of clean oil products -- gasoline, gasoil and jet fuel -- hit a 32-month high of 6.42 million mt (1.63 million b/d) in December.

Market implications

The last evidence of slowing overseas sales and the impact were seen in June when China's clean product exports fell to a seven-year low of 1.58 million mt, or 426,000 b/d.

Reflecting the shortage in the regional market that month, while the FOB Singapore 92 RON gasoline cargo against front-month cash Dubai averaged at a historical high of $35.58/b in the month, the Platts FOB Singapore 10 ppm sulfur gasoil cargo crack against Dubai surged to a 30-month high in June and averaged $63.56/b. The Platts FOB Singapore jet/kerosene cargo crack also averaged at an all-time high of $51.05/b in the month, S&P Global data showed.

"It is difficult to tell when the government will narrow the export access again. What we can do is to optimize usage of the quotas to capture the best exporting margins," a Beijing-based trading source with a state-run oil company said.

China exported 751,000 b/d of clean products in 2022, down 14.1% on the year, the country's customs data showed.

"There have been U-turns in product export policy in 2021 and 2022, which were so sudden and came with short notices," said a Singapore-based trader with a quota holder.

Economic recovery in focus

S&P Global and market analysts said they would monitor China's policy changes closely and adjust their projections accordingly. As of now, they are expecting an year-on-year increase between 7% and 16% in oil product exports in 2023, but volumes could fall quarter by quarter along with the economic recovery.

"Low economic growth will lead to more potential for export of oil products and vice versa for high growth," said Philip Andrews-Speed, senior principal research fellow at the Energy Studies Institute of the National University of Singapore.

He added the key would be the rate at which Beijing decides to stimulate the economy this year.

"Beijing will refocus on meeting its emissions pledges once the Chinese economy picks up and come out of the volatile period during its reopening, potentially leading to lower quota volumes in subsequent 2023 batches," a London-based analyst said, adding that total clean product exports in 2023 could be capped at 40 million mt, up 16% on the year, but matching the levels of 2021.

China's GDP expanded by 3% in 2022, data from the National Bureau of Statistics showed, coming in lower than the government's annual target of about 5.5% but beat market expectations. S&P Global expects China's GDP to rebound by 4.7% in 2023, helping its gasoline, gasoil and jet demand to increase by 7%, 4% and 38%, respectively.

Bernstein Research said that China's oil demand could surprise on the upside with 1 million-1.2 million b/d, or 8% growth in 2023. Current consensus estimates for China oil demand growth are pegged at 0.7 million b/d or 5% growth.

"We believe that demand growth could be 50% higher, close to 8% on a swifter exit from Covid than had been expected. China is re-opening post-Covid more quickly than we expected," it added.

The IEA has also raised its 2023 forecast for Chinese oil demand growth by 40,000 b/d to 850,000 b/d on the year, citing accelerating mobility recovery.

Q1 exports to stay high

Analysts in Beijing, Hong Kong and London said China would continue encouraging exports to stimulate the economy in the immediate near term.

"It requires time for supply chains and consumer confidence recovery, which have been damaged during three years of COVID-19 controls. As the strongest wave of COVID-19 infection fall in Q1 amid the Spring Festival travel rush, domestic demand recovery will be the slowest in the quarter," said Sun Sijia, an analyst with S&P Global.

She estimated the clean products exports to average at 3.8 million mt/month in Q1, jumping 86.3% on the year to ease high inventory and enjoy good margins overseas despite falling from the average of 4.83 million mt/month in Q4. The volume would gradually decline from Q2 onwards, with about 252,000 b/d reduction from Q1 as China's oil demand would rebound by 306,000 b/d on the quarter to average 15.5 million b/d in Q2.

By products, analysts said gasoil would attract hefty export margins as it would be in short supply in the international market amid rising demand for blending into LSFO to meet bunker demand.

But China's demand growth for the barrel would be slower than gasoline and jet fuel.

"Diesel demand has remained relatively flat at 3.5 million b/d. While road freight trends show signs of picking up, we believe that construction activity will remain subdued in 2023 leading to flat diesel demand," Bernstein said.