Analysis:Diesel release valve: China poised to save West from shortages again

As the northern hemisphere heads into winter, the U.S. and European oil sectors are counting on rising exports from Chinese refineries to ease tight global supplies of diesel, heating oil and jet fuel.

China is the world’s top oil importer and largest energy consumer. Typically, energy has flowed into China, not out of it. Growing Chinese refining capacity has, however, made the country an important fuel exporter in recent years.

Chinese supplies were key in 2022 after global oil trade was disrupted by Russia’s invasion of Ukraine and subsequent sanctions imposed by many of the world’s top importers on imports of Russian crude and fuel. Along with mild winter weather in much of the northern hemisphere, Chinese fuel exports helped avert widespread shortages of diesel, heating oil and gasoil.

Russia’s ban on diesel exports ahead of winter has sparked a new round of concerns of another supply shock. Diesel prices across Europe and the Americas are already high due to seasonal refinery shutdowns and strong demand. If the Russian export ban is prolonged, then countries such as Brazil and Turkey that have been importing Russian fuel will buy from other suppliers, increasing competition in fuel markets and driving up prices.

“U.S. distillate inventories are just barely higher than at this time in 2022, but Chinese exports seem to be ramping up like they did last year, which should prevent really bad shortages,” said John Kilduff, partner at Again Capital LLC in New York.

China’s fuel exports are set to rise by about 519,000 bpd in October, with diesel exports up about 160,000 bpd, as Chinese refiners cash in on lucrative margins, industry sources and analysts said.

Total diesel exports for the first nine months of the year are up more than 200 per cent versus the same period in 2022, at 250,000 bpd.

China is positioned to profit from diesel margins of $18 a barrel, half of last year’s peak but rising steadily and still higher than historical margins.

“We’re beginning to witness an uptick similar to last year’s once again,” said Matt Smith, lead oil analyst at Kpler.

Chinese fuel exports are currently around 1.1 million barrels per day (bpd), down from last year’s peak at 1.8 million bpd in December. Chinese refiners capitalized on record fuel profit margins last year as the market reeled after the start of the war in Ukraine.

China’s fuel exports are subject to quotas, closely monitored by the global fuel trading community. Beijing issued a third batch of fuel export quotas just over a month ago, and traders are waiting to see whether there will be a fourth batch.

China also has quotas for imports of crude oil that refiners use to make diesel and other products. Beijing issued a fourth batch of 2023 crude import quotas earlier this week, which may allow further fuel exports.

China, home to the world’s second-largest oil refining industry, is importing record volumes of crude from countries under Western sanctions. The cheaper crude from Russia, Iran and Venezuela has saved importers nearly $10 billion this year along, making for bigger profit margins for refiners – and giving them an incentive to maximize fuel output.

Additional refining capacity elsewhere added in the last year, such as Kuwait’s 630,000 bpd Al Zour refinery, has also helped alleviate tight global distillate supplies.

As China supplied more to Asia, Middle East refiners pivoted to markets in Western Europe and America, a pattern that looks set to repeat itself, Kpler said.

Diesel and heating oil inventories remain tight in many regions, even though they are growing as refiners maximize output ahead of winter.

The U.S. East Coast has struggled to replace the void left by refinery outages, with long-haul cargoes failing to fill the gap as many had expected. The region’s diesel inventories are currently around 28.16 million barrels, within 1 million barrels of last year’s historic lows, according to data from the U.S. Energy Information Administration.