China’s stimulus may briefly boost gasoil margins for Asian refiners

By Clyde Russell

LAUNCESTON, Australia, April 28 (Reuters) -- It may prove only temporary relief, but Asian refiners appear set to enjoy higher margins in coming weeks for gasoil, the middle distillate that includes diesel and jet fuel.

There are two main factors at work that are improving the outlook for the region's major industrial and transport fuel, namely the expectation of stimulus spending in China and refinery maintenance in the region, as well as the Middle East.

The profit margin per barrel of gasoil in Singapore over Dubai crude was $10.11 on Wednesday, up about 63% from the 2016 low of $6.22, reached on April 6.

While this is a fairly dramatic improvement, the current margin, or crack, is still well off levels enjoyed by the region's refiners in recent years.

The crack averaged $11.26/bbl last year, $15.89 in 2014, $17.59 in 2013 and $19.02 in 2012, showing that it has been in structural decline in recent years.

This was largely as new refining capacity came online across Asia and the Middle East, especially in China, which has turned from a net importer of gasoil to a significant net exporter in the past few years.

China was expected to ramp up exports of diesel and jet fuel in 2016, and this was certainly met in the first quarter, with diesel shipments jumping 475% to 2.771 million tons, equivalent to about 228,000 bpd.

Exports of jet kerosene rose 13.4% to 2.943 million tons, or about 252,000 bpd, according to calculations based on Chinese customs data.

Chinese refineries have been producing gasoline to meet strong domestic demand, but because many of the plants, especially newer units, were designed to maximize middle distillates, they have produced more diesel and jet fuel than the local market required.

This resulted in a surplus of diesel and jet fuel, which was expected to find its way into Asian markets.

However, in the past few weeks there have been increasing signs that the authorities in Beijing are taking steps to boost economic activity, particularly in the diesel-intensive construction and infrastructure sectors.

Chinese diesel demand was showing signs of stabilizing in March after a weak start to the year, dropping by 1.5% from the same month in 2015, according to a Barclays research note issued on Wednesday.

This compares to the 9% drop in diesel demand in the first two months of 2016 from a year earlier.

It also appears that Chinese refineries have been able to reduce the amount of diesel being produced relative to gasoline, which should also help ease the surplus.

This means that Chinese diesel exports may also steady in coming months, rather than continue to grow at rapid rates.

China is on track to export about 585,000 tons of gasoil in April, or about 137,500 bpd, according to analysis from Thomson Reuters Oil Research and Forecasts.

This would be sharply down on February's exports, but much more in line with the 12-month average of 586,000 tons.

It's worth noting that this change isn't structural, as China still has excess refining capacity and is likely to experience faster demand growth for gasoline than for diesel.

However, depending on how long and how much stimulus is applied, China's diesel demand may get a kick higher in the next few months.

Another temporary factor that may be positive for gasoil margins is the current refinery maintenance season across Asia and the Middle East.

Many refiners undertake routine turnarounds in April and May, taking advantage of the shoulder season between the higher demand periods of the northern hemisphere winter and summer.

Again, this is likely only a temporary reprieve for gasoil margins, but it's worth noting that the Singapore crack spreads are backwardated at the short end of the curve before switching to contango from November onwards.

This implies that the market is not currently pricing for the possibility of steady Chinese exports in the next few months.