(Bloomberg) -- Don't expect China -- second to only the U.S. in terms of oil refining capacity -- to rescue the world from a global fuel crisis as the nation moves to prioritize domestic markets amid soaring diesel and gasoline prices.
The country's state-owned refiners are likely to cut exports next month in anticipation of stronger local demand from April to June, according to traders and analysts who asked not to be named because of internal policy. The oil giants will probably ramp up fuel production but reduce overall exports as they try to make up for an expected shortfall from independents refiners struggling with surging feedstock costs and considering run cuts, they said.
China has the ability to produce a lot more fuel than it consumes, making it a swing exporter to the rest of Asia, but its refiners are now finding it tough to secure enough oil given that it imports around 70% of its needs. The private refiners, known as teapots, are particularly hard hit as they were importing about a fifth of their crude from Russia before its invasion of Ukraine.
“Chinese state-run companies are likely to review their export schedules for the second half, and keep the second quarter volumes at a minimum,” said Emma Li, an analyst at Vortexa Ltd. “Shandong teapots will cut runs for sure so the gap in domestic supply-demand needs to be secured. ”
See also: Pricey Oil Is Forcing Fuel Makers to Mull Processing Cuts
Average run rates at the teapots fell to 57.62% of capacity as of Tuesday, down 2.53 percentage points from a week earlier, according to JLC. The actual margins for the independents to process imported crude are now below zero, the local oil consultant said.
China's state-owned refiners will look to fill any supply gap left by the teapots by not prioritizing exports, despite the profits to be made, one of the traders said. Theoretical export margins for Chinese refiners to ship diesel to Singapore are now around 300 yuan ($47.47) a ton, compared with below zero in February, according to estimates by OilChem.
Asia's largest economy had an oil refining capacity of 16.69 million barrels a day in 2020, behind only the U.S. with 18.14 million barrels a day, according to data from BP Plc. China's exports of oil products dropped 33% over January and February from a year earlier, JLC said, after it halved the national fuel export quota in its first batch of allocations for 2022.
China's diesel exports are likely to increase this month as refiners release inventories built up over January and February, said Jane Xie, an analyst at Kpler. “Given the renewed focus on energy security in the wake of high oil and gas prices,” exports should then remain limited, she said.
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With assistance from Bloomberg
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