China's reliance on locally produced LSFO to rise as Beijing lifts export quota for 2022

Chinese marine fuel suppliers are set to increase reliance on domestically produced low sulfur fuel oil for bonded bunkering after Beijing lifted export quota allocations by 31.7% year on year to 15 million mt for 2022 on Sept. 9, helping Zhoushan to grow as a regional bunkering hub, refiners and analysts said Sept. 13.

The increase in allocation stems from 2.75 million mt, or 17.46 million barrels, of LSFO export quotas allocated in the fourth batch, S&P Global Commodity Insights reported previously.

The government issued 12 million mt of LSFO export quotas in 2021, while Sinochem and Zhejiang Petroleum & Chemical collectively transferred 610,000 mt of their quotas into the permits for exporting gasoline, gasoil and jet fuel, leaving the actual LSFO to 11.39 million mt for the year.

As supply was expected to rise with the new allocation, the delivered Zhoushan marine fuel 0.5% bunker premium to Singapore marine fuel 0.5%S cargo started to weaken after the issuance of the fourth quota. The premium dropped to $68.04/mt on Sept. 12 from $76.52/mt on Sept. 9, the highest since July 25, S&P Global data showed. Prior to Sept. 9, the premium was strong because of tightened supply amid a lack of export quotas, market sources said.

The Chinese government has been encouraging bunkering and the production of LSFO as it is a cleaner fuel with lower sulfur content.

The higher allocation in 2022 helps Chinese refiners earn bonded bunkering profits by supplying domestically produced tax-free LSFO at Chinese ports amid tight global supplies. These quotas, however, do not permit fuel oil cargo exports, which attract taxes.

As a response, Chinese refineries' LSFO production in January-August jumped 42.5% year on year to 9.97 million mt, with monthly production hitting a record-high 1.51 million mt in July, data from local information provider JLC showed.

PetroChina's Liaohe Petrochemical is one of the key contributors, which raised its LSFO production to a record-high 170,000 mt in July to account for half of PetroChina's output for LSFO, a company report showed.

Several sources with other refineries, including those with PetroChina and Sinopec, also said that they will raise LSFO output as the export access for gasoline, gasoil and jet fuel is narrowing.

This trend led the domestically produced LSFO to account for 66.6%, or 7.12 million mt, of China's bonded bunker fuel oil exports in January-July, reflecting a 17.6% year-on-year jump, S&P Global estimated based on official data. China also supplies bonded bunker fuel oil at its ports with imported barrels.

Current allocation still not enough

Sources said bunker suppliers may face a shortage of export quotas later in 2022 as the current allocation is not enough. "These quotas can cover only 80%-90% of what we need. We may see a shortage in December," a source at a Chinese company said.

Strong delivered and ex-wharf Zhoushan bunker premiums to Singapore marine fuel 0.5%S cargoes are expected to decline over the coming weeks as production rises.

"The refiners will take two to three weeks to plan and to digest and after that they raise production. The premiums will be softer," said a Chinese bunker supplier.

However, higher freight activity in the fourth quarter could steady prices due to strong demand, bunker suppliers said.

Market participants expect the latest bonded fuel oil export quota to run almost dry in the fourth quarter, with cargo imports from Singapore likely supplementing bunker inventories.

"Importing cargoes from Singapore would make sense due to the depressed premiums," a trader said, amid healthy stockpiles and lackluster demand in the downstream bunker market.

A build in LSFO stocks at the world's largest bunker hub lowered the cash differential of Singapore marine fuel 0.5%S cargoes to an average of 80 cents/mt over Sept. 1-12, from $16.39/mt in August, S&P Global data showed.

In the fourth batch of allocation, PetroChina's parent company CNPC topped the list with 1.32 million mt new quotas. Sinopec has remained the top quota holder with 8.21 million mt allowance so far this year, up 18% from 2021.