May 22, 2024
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How China Could Rescue the West from Diesel Crunch

As West is headed for the winter season of higher heating oil and gasoil consumption amid low diesel stocks in Europe and the United States, China could come to the rescue of a tight global diesel market once again as it did at the end of last year.

There is a lower supply of diesel-yielding higher-sulfur crudes from the Middle East, and the temporary Russian ban on diesel exports disrupted global flows at the end of September and early October. suggests that China could be the exporter to save some regions from diesel shortages and spiking prices.

Analysts say signs have already started to emerge that Chinese diesel and other fuel exports are picking up, this 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.

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.

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, and the prices have risen while the near-term prospects for rebuilding stocks “are modest at best,” the analysts say.

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.

Europe has replaced Russian fuel imports after the embargo, but it is now more vulnerable to the global market forces in middle distillates

Thus, China could ease the global diesel market if it boosts 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.

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.

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