China Is Sitting on an Ocean of Diesel Fuel
The nation exported a record volume of the fuel last month after already shipping unprecedented amounts of steel and aluminum overseas. The weakest economic growth since 1990 is sapping domestic demand for commodities, while refineries, mills and smelters grapple with excess capacity after years of expansion.
“A lot of it has to do with slowing demand at a time when companies had plans for much a better demand environment, so capacities had been increased,” said Ivan Szpakowski, a commodities strategist at Citigroup Inc. in Hong Kong. “As demand slows, that’s led to an overcapacity in the domestic market and producers have sought to export the surplus.”
Refining profits, or cracks, from making diesel in the Asian oil trading hub of Singapore have shrunk about 30 percent from a year ago as exports from China, India and the Middle East create an oversupply, according to Ehsan Ul-Haq, an analyst at KBC Advanced Technologies in London.
“The world is becoming an ocean of diesel,” said Ul-Haq. “Demand in China is not as high as it was previously expected. Chinese refiners are becoming more export oriented.”
China’s August shipments of the fuel, also known as gasoil, surged 77 percent from a year earlier to a record 722,516 metric tons, or about 175,000 barrels a day, according to data released this week by the General Administration of Customs. They may rise to about 250,000 barrels a day later this year, according to ICIS China and JBC Energy GmbH, industry consultants.
The surplus may persist if the scandal over Volkswagen AG diesel engine emissions tests hurts demand growth in the longer term, according to Gareth Lewis-Davies, a senior energy commodity strategist at BNP Paribas in London. The German auto-maker was found to have tried to dupe regulators and consumers about emissions of diesel engines installed in 11 million cars worldwide.
“If, as a consequence of the Volkswagen issue, growth of distillate demand is affected, it means it will take longer for the current overhang in distillate markets to dissipate,”Lewis-Davies said by phone. “It has negative implications for distillates only in the longer term.”
China’s apparent diesel demand was at the second-weakest pace in a year in August, growing at 3.6 percent from the same month in 2014. By contrast, gasoline demand surged 19 percent, data compiled by Bloomberg show.
“The divergence between strong gasoline demand and weak diesel demand domestically is creating headaches for Chinese refineries,” Amrita Sen, chief oil market analyst at Energy Aspects Ltd., a London-based researcher, said in an e-mail. “This underpinned record diesel exports in August, a trend that is likely to continue although run cuts should ease the pace of exports somewhat early in the fourth quarter.”
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