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Analysis: Chinese fuel suppliers stand ready to capture global demand recovery later in 2020

Highlights

Year-to-date fuel export quota already exceeds full-year 2019 level

Sufficient quota allows boost in exports when global demand recovers

Platts Analytics expects China's fuel exports to reach 65 million mt in 2020

Singapore — With more than a month left until the halfway point of 2020, China's oil product export quota allocation has already exceeded last year's quota, providing more flexibility for Chinese oil companies to arrange export plans to capture any recovery in international fuel demand later in the year.

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China's Ministry of Commerce has announced two rounds of export quota allocations to date this year, allowing five state-run fuel suppliers Sinopec, CNPC, Sinochem, CNOOC and China National Aviation Fuel, to export up to 56.03 million mt of oil products in 2020, exceeding the quota level of 56 million mt for the whole of 2019.

Major Asian fuel exporters, including South Korea and India, have been struggling to export cargoes since late in the first quarter as the number of willing buyers in the international market has dwindled following the coronavirus pandemic.

However, Beijing's decision to boost export quotas despite demand destruction in the global market is widely seen as a prudent move, as Chinese fuel suppliers could prepare early to compete with other major exporters in the region when signs of energy consumption recovery appear later in the year, industry sources and market analysts said.

"Sufficient quotas allow China to react faster than other suppliers once global oil product demand comes back when lockdowns end. Chinese refineries have ramped up their throughput levels earlier than international competitors," a Beijing-based analyst said.

"The higher allocation is more likely to be the government's attempt to boost China's economy, by encouraging both domestic output and international trades," a Singapore-based analyst said.

China's combined exports of gasoline, gasoil and jet fuel rose 9.1% year on year to 15.26 million mt in Q1, latest data from the General Administration of Customs showed.

2020 EXPORTS

On top of the 56.03 million mt quota allocated to date this year, the ministry is expected to release another round of quota allocation in the second half of the year, allowing higher exports to offset any downfall in overall domestic sales in 2020.

"We will make good use of the quotas when the demand improves in H2," a source with a PetroChina exporting refinery said.

China's aggressive exports would be a threat to South Korean refiners that are hoping to outperform in international fuel sales when global oil demand enters a recovery phase, an official at the Korea Petroleum Association based in Seoul said.

"China [is expected] to export about 65 million mt of oil products in 2020, around 10 million mt higher than the actual exports of 55.36 million mt in 2019, prompted by negative demand growth [in the domestic market] and expanded refining capacities," said Kang Wu, S&P Global Platts Analytics' Head of Global Demand, Risk & Asia Analytics.

Several analysts expect China's oil demand to fall by around 2% year on year in 2020 due to COVID-19, and state-run refiners would be keen to clear any excess and unsold domestic barrels by selling them overseas.

China's refining capacity would rise 3% or 24.5 million mt/year in 2020, crossing the 900 million mt/year (18 million b/d) mark to 905 million mt/year, Sinopec Economics & Development Research Institute said.

TEPID JET FUEL DEMAND

Jet fuel exports could, however, underperform versus other oil products, as the global aviation sector would likely need a longer period for any meaningful recovery as governments across the world adopt an extra cautious stance in international travel.

The 2020 jet fuel export quota under the trade route is so far lower than that of other fuels at 6.51 million mt, down 16.5% from the 7.8 million mt for the whole 2019. Only two oil companies -- CNPC and Sinopec -- applied for jet fuel export quotas in the second round of allocations.

"In the short term, the Chinese will likely prefer to travel within the country rather than go overseas. We don't need much jet fuel quotas under the processing trade route," a state-owned refinery official told Platts.

Export quotas are allocated under two routes: the general trade route and the processing trade route. The general trade route offers exporters more flexibility than the processing trade route, which comes with conditions such as the exported product must be produced from imported crude oil and must be from a refinery awarded an export quota. But products exported under the processing trade route are naturally tax-free and targeted for bonded supplies for international transportation.