China’s 15m-ton oil products export quota could increase 1000s to EU
On September 30, 2022, China added 15 million tons to its petroleum product export quota for 2022. The quota includes 13.25 million tons for gasoline, diesel and jet fuel as well as 1.75 million for low sulfur marine fuel. Should it head to the EU, it could be a welcome addition to the bloc seeking to replace an average of 2 million tonnes of diesel imports from Russia when sanctions kick in from February 2023 and the heating demand will increase during the winter months. It could also add valuable ton-miles for product carriers.
The addition of 15 million tons brings the total 2022 quota for gasoline, diesel and jet fuel to 37.25 million tons, on par with 2021. increases the full annual quota for gasoline, diesel and jet. 55% fuel.
In the first nine months of 2022, exports of gasoline, diesel and jet fuel were 45% lower than in 2021. So far, 18.4 million tonnes have been exported, leaving 18.85 million of the entire year’s unused export quota. To fulfill the full year quota, average monthly exports during the fourth quarter would need to triple from the year to date. This seems unlikely and many analysts expect refineries to be allowed to use the 2022 quota in 2023.
“Chinese diesel exports were particularly weak in 2022. In the first nine months of the year, diesel exports fell 72% year-on-year. A return to 2019 levels could increase average monthly diesel export volumes by 1.3 million tonnes to 1.8 million tonnes,” said Niels Rasmussen, chief shipments analyst at BIMCO.
The increase in diesel exports is of particular interest because EU sanctions against Russian refined petroleum products will be implemented on February 5, 2023, and since 90% of import volumes are diesel. At present, imports of Russian crude oil from the EU are almost 25% lower than last year, but imports of diesel from Russia have not yet decreased.
“From February 2023, the EU must replace an average of 2 million tonnes of diesel imports from Russia. In addition, the International Energy Agency has estimated that EU demand for refined products will increase by 300,000 to 500,000 barrels per day during the winter to meet heating needs. A possible increase in Chinese exports could make this process much easier and provide a business opportunity for Chinese refiners as well as very attractive ton-miles for product carriers,” Rasmussen says.
However, the 2 million barrels per day production cut recently announced by OPEC+ could increase price volatility and increase the risks that Chinese refineries face when exporting to Europe. Any drop in price between the time crude oil is purchased and the time the refined product can be sold can result in losses for refineries. As the time between buying and selling is longer when exporting to Europe, the price risk is higher. Chinese refineries could therefore also concentrate their increased exports on Southeast Asia. In this case, the volumes will most likely replace volumes from India and the Persian Gulf which may then head to the EU instead.
In either case, it should be noted that an increase in refined product exports will also help revive China’s crude oil imports which have suffered from both weak domestic demand and weak refined product exports.