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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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China's Fuel Export Quota Could Spark Global Supply Challenges

  • Chinese refiners face weaker domestic margins and are grappling with limited fuel export quotas.
  • Despite increased refining margins in Asia, China's fuel exports are constrained by quota limitations.
  • Global fuel markets may face challenges as China is unlikely to alleviate potential shortages due to these constraints.

China saw its exports of gasoline drop in October from a year earlier and from September as Chinese refiners grapple with weaker domestic margins and limited remaining fuel export quotas.    

The decline in fuel exports out of China suggests that the world's top crude oil importer may not be able to come to the rescue of the Asian and global fuel markets this winter like it did last winter, Reuters columnist Clyde Russell notes.

Last month, China's diesel exports rose by 4.4% year over year to 1.1 million tons, but were down from September's 1.18 million tons of exports, according to data from the General Administration of Customs of China. 

But gasoline exports slumped by 20% compared to October 2022, as domestic demand surged during a week-long holiday in early October. 

Diesel shipments held relatively strong as Chinese domestic demand continues to wobble amid the ongoing crisis in the property sector and mixed manufacturing activity in recent months. 

But it looks like China's diesel exports peaked this year in June, Reuters's Russell says. Chinese exports of diesel have declined since then, with the exception of August, when refiners got a third batch of fuel export quotas. 

Between January and August, Chinese refiners tripled their diesel exports as export quotas and rising refining margins in Asia proved incentives enough amid tepid domestic diesel demand. In the first eight months of the year, China's diesel exports soared by 197.2% compared to the same eight months of 2022, according to data from the General Administration of Customs cited by Reuters.  

At the end of August, China issued a larger-than-expected fuel export quota in the third batch of allocations for 2023 as authorities sought to incentivize refiners to sustain economic growth and sell more product abroad at a time when China's 2023 fuel demand may have peaked.

The third batch of export quotas brought the total 2023 quota volumes above the allowances awarded for the who

+le of 2022, according to Bloomberg's estimates. 

As a fourth batch of export quotas for this year hasn't been issued, Chinese refiners could further limit fuel exports due to a lack of quotas for the remainder of 2023, despite the stronger margins on the Asian market compared to the domestic market.  

Therefore, Chinese refiners may not be in a position to come to the rescue of the Asian, and indirectly Western, fuel markets in case a cold winter raises demand more than currently expected. 

The drying Panama Canal due to a lack of rainfall and congested tanker and cargo vessel traffic there could also impact global fuel markets as ships will have to make longer voyages if they want to avoid passing through the canal. Nearly half of the volumes of goods that were shipped through the Panama Canal in 2022 consisted of petroleum, refined petroleum products, and gas-based products, according to data from the Panama Canal Authority cited by Bloomberg.    

While global fuel supplies are not as tight as they were in late 2022, the longer tanker travels due to the Panama Canal's limitations could affect fuel supplies in some regions. 

With a lack of additional fuel export quotas, Chinese refiners may not be able to alleviate potential shortages. 

"China's clean fuel exports will remain capped for the remainder of 2023, as refiners have not yet received the long-awaited fourth batch of export quotas or approvals to convert their remaining LSFO quotas for CPP exports," Emma Li, Senior Market Analyst at Vortexa, wrote earlier this month. 

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"Market participants have indicated that both Chinese state-run refiners and non-Shandong independent refiners are planning to reduce run rates in November, with deeper cuts expected among independent refiners,' Li added. 

"State-run refiners may only reduce production by 2-3% to address declining domestic margins, tight export quotas, and the need for seasonal maintenance."  

By Tsvetana Paraskova for Oilprice.com

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