China rolls out new oil export quotas in bid to cut stocks at home

Singapore — China has allocated a fresh round of oil product quotas in an effort to cut bulging domestic stocks, a move that could potentially add a stream of cargoes to an already oversupplied overseas market that is struggling to recover due to the demand destruction it witnessed because of COVID-19.

Sources with knowledge of the matter said Nov. 21 that the Ministry of Commerce has issued a third round of oil product export quotas for 2020 totaling 3 million mt under the general trade route to CNPC, Zhejiang Petroleum & Chemical and China North Industries Corp., or Norinco.

The new allocations would allow quota holders to export gasoline, gasoil and jet fuel and will expire at the end of the year. This would lift total quotas for 2020 by 5.4% year on year to 59.03 million mt, although actual exports in the first three quarters have remained relatively lower compared with the same period in the previous year.

The country has so far exported 38.73 million mt of gasoline, gasoil and jet fuel over January-October, down 12.% from the same period of 2019, General Administration of Customs data showed.

S&P Global Platts Analytics expects key product exports to be at 1 million b/d, or 46 million mt, in 2020, 13 million mt lower than total allocated quotas.

Privately-owned ZPC received its first quota allocation totaling 1 million mt, which will enable the new refiner to carry out its export plans and load its first gasoline export cargo from its own port in Zhoushan by the end of November, a company source said.

"It could be more economical to load gasoline via LRs, but all depends on our sales," the source said Nov. 23.

ZPC plans to use as much of its quota allocation as possible to export gasoline in 2020 in an effort to clear stocks, despite margins for exports remaining relatively weaker than the domestic market.

But the source added that given the short time frame it would be difficult to entirely use up the allocated quotas. The refiner currently produces around 200,000-250,000 mt/month of gasoline.

Norinco joins the list

State-owned Norinco also joined the quota holder list, receiving an allocation of 50,000 mt.

Norinco's 6 million mt/year North Huajin Chemical refinery plans to export around 50,000 mt of gasoil to a fixed outlet from Yingkou port in mid-December, a company source said Nov. 23.

"We will resume gasoil exports in December as part of our preparation to continue exports in 2021, even though domestic demand is currently better than what we see in overseas markets," the source added.

In a development that came as a surprise to the market, CNPC was awarded an additional 1.95 million mt of quotas, raising the state-owned oil giant's total quota volume for 2020 by 11.6% from 2019 to 20.48 million mt.

Platts Analytics projects China's major refined product exports to be at about 1 million b/d in November and to rise to 1.1 million b/d in December on the back of the third round of export quotas.

According to market sources, ZPC would be aiming to export 1.67 million mt of gasoline in October, about 1.47 million mt of gasoline in November, and a relatively higher volume in December. This would add to the plentiful gasoline supplies in the international market in the last quarter.

Price fallout

The new round of oil export quotas from China have notably exacerbated the bearish tone in the Asian gasoline market, industry sources said, with one noting that the "market is already quite heavy with cargoes as some regional refiners have started to raise runs slightly."

"We already have cargoes on the way here from Europe to Asia. With the additional barrels from Rong Sheng (ZPC), December is set to be a weak month," the one industry source added.

Weighed by supply-side concerns, the FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude futures has averaged $2/b month to date as at the Nov. 20 close of Asian trade, down from the $3.32/b average assessed in October.

Echoing the bearish sentiment, another source said: "This small amount could be a test [from the Chinese government] to see if private refiners are able to both cater to export and domestic market. If all goes well, independent refiners might start to be part of the quota allocations from 2021 onward."

Meanwhile for gasoil, there are talks in the market that China is likely to cut exports to 1 million-1.2 million mt in December, from about 1.82 million mt in November, despite Norinco Huajin's export plan.

"China's gasoil output has been slowing down from the peak of July, easing the pressure and the need to throw more barrels to overseas markets," a Beijing-based analyst said.

Latest official data showed China's gasoil output was at 13.3 million mt in October, down 12% from the recent high of 15.11 million mt in July.

CHINA'S OIL PRODUCT EXPORT QUOTAS FOR 2020 ('000 MT)

Source: Market sources