Analysis: Pakistan's clean fuel push likely to provide potential new outlet for Chinese cargoes

Singapore — Pakistan's thirst to adopt cleaner motor fuels by 2021 will likely provide some support to the Asian gasoline and gasoil markets in the medium term as the expected abundance of low-sulfur cargoes from China in August is set to quench Pakistan's domestic demand amid restricted local supplies.

In mid-June, the Pakistan government mandated a ban on gasoline imports of less than Euro 5 standard from August onwards. Gasoil imports of less than Euro 5 standard will also be banned but from January 1, 2021, due to a current long term agreement with Kuwait Petroleum Corporation to import gasoil of Euro IV standard.

Prior to the announcement, motor fuel imports were of Euro 2 standard, with gasoline imports being of the non-oxygenated grade with maximum 500 ppm sulfur, according to tender details issued previously by state-run importer Pakistan State Oil, or PSO.

With the switch to Euro 5, sulfur content in imported gasoline and gasoil will drop to a maximum of 10ppm, and the inclusion of oxygenates will be allowed.

PAKISTAN SUPPLY-WOES

The impending switch to cleaner fuels is expected to spur demand, with additional imports set to fill supply gaps as domestic production remains limited, sources said.

Since mid-June, Pakistan has already grappled with tight domestic gasoline inventories, reflecting a combination of low refinery run rates and a sharp recovery in driving activity.

Domestic supply tightness was also "due to the artificial shortage created by some OMCs [Oil Market Companies] and/or their dealers for profit maximization," a statement by the Ministry of Energy (Petroleum Division) said on June 11.

The country's petrol supply dipped to a surplus of only 11-days in mid-June, prompting PSO to accelerate gasoline import volumes by two more than the usual requirement of around six MRs per month, and raise cargo sizes to 55,000 mt, from 45,000 mt previously, S&P Global Platts reported earlier.

Moreover, Pakistan's aging refineries are also set to add to the conundrum.

"[Pakistan] refineries are not ready [to produce cleaner fuels] and they will keep producing [their current grades] for some time. [The entire] change [is] just for imports," one Pakistan-based source said.

Highlighting the divergence between the country's clean fuel targets and its refining capabilities, a second source noted "if the country [Pakistan] wants to move entirely to clean fuel, they will have to rely a lot more on imports."

From July 2019 to May 2020, Pakistan's production of gasoline and gasoil accounted for only 26.58% and 59.4% of domestic consumption respectively, according to data from Pakistan Oil Companies Advisory Council.

CHINESE CARGO ABUNDANCE

Chinese cargoes will likely become increasingly attractive, especially due to expectations of greater Chinese oil product exports in August, sources said.

According to a Beijing-based analyst, China is expected to export 1.3 million-1.5 million mt of gasoline in August, with gasoil exports possibly hitting 1.9 million mt.

In comparison, China exported only 760,000 mt of gasoline and 1.04 million mt of gasoil in June, data from the General Administration of Customs showed.

Since mid-June, "widespread floods after heavy rainfalls... have curbed China's oil demand, especially for gasoil due to a shutdown in outdoor construction activities," said Sun Jianan, an analyst with Platts Asia Analytics, adding that this may prompt China to increase its gasoil cargo exports to long-haul clients.

"Chinese transportation fuels have moved to a China VI standard, a proxy of Euro VI, in the domestic market since 2019. There is no technical issue for Chinese refineries to produce low sulfur fuel," Sun said.

"Hopefully this new Pakistan demand will help to draw some cargoes away from Asia," a trader said, adding that this will temper the bearish outlook.

In the gasoil market too, demand fundamentals remain weak.

Concerns over a resurgence in COVID-19 cases has also sparked with restrictions on transportation and movement of people restrictions still being practiced in many countries.

At the Asian close on August 3, the cash differential for 10 ppm sulfur gasoil cargoes for loading from Singapore dipped to a more than two-month low of plus 14 cents/b to the Mean of Platts Singapore gasoil assessments.

Platts data showed that the assessed cash differential for the Asian benchmark ULSD grade was last lower at minus 5 cents/b to MOPS gasoil assessments, on May 29, 2020.

"China [cargoes] can also come but as we have tenders, those are open for everyone from China to AG to Europe and Far East," one source familiar with Pakistan's import activity added.