China halts fuel exports in October, adding to global oil supply tensions
China cut its fuel exports in October to increase domestic fuel supplies. Asian diesel futures traded at a wider price spread on falling global oil stocks.
China put an end to its fuel exports starting in October.
October saw the announcement of the decision to suspend the export of petroleum products by relevant departments in China. This policy shift has directly defied the market's previous expectations. In March this year, the supply of crude oil from the Middle East was disrupted, and China had previously restricted fuel exports at that time. By July, China relaxed the restrictions and began to manage the transportation of diesel, gasoline and aviation kerosene on a monthly basis.
To maintain domestic fuel stocks, the Beijing authorities have decided to suspend the export of refined oil products this month. This move is significant as China is the world's largest crude oil importer and an important fuel supplier in Asia. The domestic fuel stock situation may be more severe than what is seen by the outside world.
Domestic inventories are running dangerously low.
Analysis by institutions shows that the domestic commercial diesel inventory still has a huge gap from the pre-war level. Gasoline inventory also shows a clear shortage. The government's primary concern is the security of domestic supply, the international market is a secondary issue. With crude oil supply uncertain and local fuel inventories low, Beijing has turned its eyes on supply security. China has the largest refining capacity in the world and can ramp up exports. For refineries to seize export profits, domestic inventories must first be sufficient. Unless inventories return to the pre-war level, exports will be blocked.
Based on this, it can be judged that the probability of Chinese fuels returning to the international market in the short term is extremely low. Stimulated by the news of export suspension, the futures market for Asian fuels experienced large fluctuations. The diesel price indicator rose rapidly during the period from October to November. Diesel, as a core fuel for industry and transportation, has extremely high sensitivity to supply and demand. As an important exporter, China's withdrawal directly changed the supply and demand pattern of the Asian market. Futures traders frenziedly bought far-month contracts to hedge against the possible shortage risks in the future.
Global fuel supply is becoming even more strained.
Now, the war in Iran and the attacks on Russian oil refineries by Ukraine have already led to a reduction in global fuel supply. China's further ban on exports has compounded the fuel shortage. The market is beginning to get worried about some countries reverting to high fuel prices again.
US Energy Secretary said the world has lost diesel exports from the Middle East and China. He expects Europe to come out with new information on diesel supply soon. The Trump administration is reported to have called on Germany and France to reduce emergency diesel stocks to ease price pressure. Otherwise, they may face sanctions from the US for prohibiting diesel exports.
The shortage of spot market supplies has been transmitted to the futures market.
According to research institutions, the inventory of commercial diesel and vehicle diesel in China is 20 million barrels below the warning level. The gasoline inventory is also 9 million barrels short. In September, China exported 1.4 million tons of diesel, 500,000 tons of gasoline, and at least 2 million tons of aviation fuel, which was a decrease compared to August. Some major companies cancelled their planned orders for gasoline and aviation fuel shipments in October. Several large private refining and chemical enterprises halted shipments during the holiday period.
Fuel buyers in Asia need to quickly find substitutes. The main destinations for China's fuel exports include countries in Asia such as Singapore, Malaysia and Vietnam. Korean refineries are considered to be able to partially fill this gap. However, the actual quantity that can flow to the free market is very limited. Some fuel-importing countries that are highly dependent on China face the risk of supply disruption. Although they have stated that they can purchase from other places, they will find it difficult to make up for the huge quantity gap in the short term.
The price of diesel has soared.
The market reacted sensitively. As it was expected that China would reduce diesel exports, the price difference in Asian diesel swap transactions has reached its peak within two weeks between the contracts for October and November. The panic purchasing expectations of global buyers have formed a strong upward pull in the futures market. There is hardly any obvious resistance to the upward trend of the futures prices.