China could come to the rescue of a tight global diesel market once again, as it did at the end of last year, thanks to expected higher distillate exports at the end of 2023.
The West is headed for the winter season of higher heating oil and gasoil consumption amid low diesel stocks in Europe and the United States, lower supply of diesel-yielding higher-sulfur crudes from the Middle East, and the temporary Russian ban on diesel exports that disrupted global flows at the end of September and early October.
China could be the exporter to save some regions from diesel shortages and spiking prices. Signs have already started to emerge that Chinese diesel and other fuel exports are picking up, analysts say.
These exports could indirectly ease the tight market in the West—more Chinese exports to the Asian region means that more Middle Eastern fuel exports could go to Europe and the Americas, where middle distillate inventories are tight.
Low Diesel Stocks
In the United States, distillate fuel inventories decreased by 1.8 million barrels in the week to October 6 and are about 11% below the five-year average for this time of year, the EIA's latest inventory report showed.
Refinery outages, changed global oil trade flows, a cautiously optimistic freight market in the United States, and inventories at some of the lowest levels in years have tightened the diesel market and are likely to tighten it further in the coming months, especially if a cold winter hits the Northeast, where diesel and other distillate supplies are very tight.
The market for heating oil, diesel, and other middle distillates in the Northeast is unusually tight right now, just ahead of the winter heating season, with inventories near their five-year lows, analysts at RBN Energy wrote in an analysis this month. Prices have risen while the near-term prospects for rebuilding stocks "are modest at best," they say.
In the 2022–2023 winter, nearly 5 million households in the United States used heating oil (distillate fuel oil) as the main space-heating fuel, and about 82% of those households were in the U.S. Northeast, per EIA data.
A perfect storm of heavy maintenance at refineries in eastern Canada and the U.S., stretched global diesel supplies, and a resilient U.S. economy with decent manufacturing and freight demand could renew upward pressure on diesel and other distillate prices in the coming months.
Meanwhile, in Europe, diesel-type inventories independently held at the Amsterdam-Rotterdam-Antwerp (ARA) oil trading hub are also looking quite tight and have declined to their lowest level so far this year, analysts say.
Europe should hope for another warmer-than-usual winter to avoid diesel shortages and soaring prices, as the region is now waiting for weeks and months for diesel supply to arrive from the Middle East and Asia, Bloomberg's Julian Lee noted last week.
Europe has replaced Russian fuel imports after the embargo, but it is now more vulnerable to the global market forces in middle distillates.
China To The Rescue?
China could ease the global diesel market if it boost its fuel exports. Early data suggest that it may do that.
"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," John Kilduff, partner at Again Capital LLC in New York, told Reuters last week.
"We're beginning to witness an uptick similar to last year's once again," Kpler lead oil analyst Matt Smith told Reuters.
China's exports of refined petroleum products are set to rise in October compared to September, with gasoline and jet fuel seeing the biggest increases month-over-month, according to industry estimates compiled by Reuters.
In diesel, Chinese refiners tripled their exports of diesel between January and August, as export quotas and rising refining margins in Asia proved incentives enough amid tepid domestic diesel demand.
Reports emerged at the end of September that Chinese authorities told the biggest oil refiners in the world's top crude oil importer not to rely on more fuel export quotas for the rest of the year.
Yet, large refiners are looking to take advantage of the much higher margins on the export markets compared to the domestic market.
China's Sinopec, the biggest refiner in Asia, has reportedly applied with authorities to exchange part of its export quotas for marine fuel for quotas to export diesel, jet fuel, or gasoline, industry sources told Reuters last week. Potential approvals could be issued by the end of this month, according to one of Reuters' sources.
"The sharp decline in Asian gasoline cracks in recent weeks, contrasting against stable middle distillate cracks, is also incentivising refiners to increase exports of diesel and jet fuel at the expense of gasoline," Emma Li, senior market analyst at Vortexa, wrote in an analysis earlier this month.
"China's diesel production will pick up in Q4 amidst seasonal demand strengths in the country, and Chinese refineries may prioritise diesel production and exports over jet fuel based on jet regrade signals," Li added.
By Tsvetana Paraskova for Oilprice.com
