Weaker oil product margins may limit China's H2 2024 exports despite quota boost

Weaker clean oil product margins could weigh on outflows from China in the second half of 2024, despite expectations that the government may significantly raise export quotas for refiners, refining and trade sources told S&P Global Commodity Insights.

The Chinese government is considering the release of 15 million mt of oil product export quotas in September, according to the sources, that will bring the country's total clean oil product export quota to 48 million mt for 2024.

In the first half of 2024, China's clean oil products exports declined 2.7% year on year to 19.86 million mt (865,000 b/d) because of slower overseas demand and thin export margins, leaving about 13.14 million mt of quotas available for the second half of the year until a new batch of quotas is released.

China's 2024 clean oil product exports have been widely expected to remain steady on the year at about 40 million mt, due to less attractive export margins and a slight surplus in the domestic market.

"Higher exports would hurt China's refining margins and further dampen product cracks in international market," said a Beijing-based trade source from a state-owned oil giant.

Assuming stable exports on the year in 2024, Commodity Insights analysts expect China's export margin for gasoline to stay negative over August-December due to weakening regional demand, especially in the fourth quarter when the peak driving season ends.

The gasoil export margin is expected to remain profitable in the second half of the year, but it could decrease before rebounding in November, when the domestic peak demand season ends and heating demand picks up in the regional markets, said Hu Minmin, Commodity Insights associate director of downstream research and analysis.

"[However] if China lifts its exports, we are more likely to see a deeper loss in gasoline and less profit in gasoil," she said, adding that Chinese refineries may send out more surplus refined product barrels amid plump profits from petrochemical products, but this may not happen in 2024 as chemicals have been making losses in the domestic market.

"If we have more gasoil coming to Asia from September, this could add further downward pressure on cracks and prompt refiners to impose mild refinery run cuts. But in general, if the cracks are still positive, the cut won't be too much," a Singapore-based trade source said.

The FOB Singapore 10 ppm sulfur gasoil derivative crack spread to the front-month Dubai swap -- which measures the relative strength of the product to the crude it is refined from -- narrowed 92 cents/b to $16.69/b at the July 30 Asian close. The crack was at a 93 cents/b premium to jet fuel/kerosene and $6.70/b higher than 92 RON Gasoline, Platts pricing data from Commodity Insights showed.

Aug exports seen rising

China may export 3.27 million mt of gasoline, gasoil and jet fuel in August, increasing 2.5% from the projected 3.19 million mt in July, according to the refinery and trade sources.

Jet fuel exports could fall to 1.7 million mt in August, from about 1.87 million mt in July, following the summer holidays. August gasoline outflows may rise to about 990,000 mt, from 670,000 mt in July, with PetroChina as the top exporter, while gasoil exports may strengthen 18% on the month to 590,000 mt.

"I am surprised the gasoil portion is so low. I had expected it to be in the 650,000-700,000 mt range since domestic demand for gasoil is weak," a regional middle distillate trader said. "I thought this would incentivize refiners to export more gasoil than gasoline."

Commodity Insights has projected an export loss for gasoline of 98 cents/b on average in August, and a profit for exporting gasoil of $3.37/b.

Sinopec, China's leading gasoil exporter, could save more of its export quotas for jet fuel, which has been bringing in steady profits, according to the sources. The oil giant is targeting exports of 900,000 mt of jet fuel and 400,000 mt of gasoil in August.

The FOB Singapore jet fuel/kerosene cargo crack spread against front-month cash Dubai averaged $16.81/b from January to July 30, narrowing from $19.81/b over the same year-ago period, Platts data showed, indicating a decline in refinery margins.

China's domestic jet fuel prices move in line with Mean of Platts Singapore jet/kerosene.

Norico's Huajin Petrochemical, which solely exports gasoil, will suspend outflows in August due to scheduled maintenance that will last until early September, a source with knowledge of the matter said.

China's leading gasoline exporter PetroChina is aiming to send 550,000 mt of gasoline overseas, the refinery and trade sources said.