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Traders expect China to announce third round of product export quotas in the fall

Asian oil product traders expect to see a third round of export quotas to be issued by the end of September to October amid the expansion of refining capacity in the country, trade sources told S&P Global Platts this week.

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"As more independent refineries come on stream, we expect to see more oil product export quotas coming out later this year," a Singapore-based trader at a Chinese trading house said. "The quota could come out by September to October."

An independent refinery source in Shandong added: "It's likely that the government will give export quotas to independent refineries in order to ease the surplus situation in the domestic market."

He added that the Ministry of Commerce was conducting feasibility studies to examine the prospects of independent refineries exporting oil products.

In May, China's Ministry of Commerce had allocated a second batch of oil product export quotas under the processing trade route for 2019, totaling 4.71 million mt, to four state-owned oil companies such as CNPC, Sinopec, CNOOC and Sinochem, Platts reported previously.

A third round of export quotas have been called for by many independent refineries in Shandong recently, especially after the full startup of Hengli Petrochemical in late May.

Some market participants believe that the third round of export quotas would also be given to independent refineries with new plants.

"I won't be surprised to see one or two independent refineries given export quotas," a trade source said. "And it would only be fair if the other state-owned refineries get allocated some at the same time."

After the second round quotas issued in May, total oil product quotas allocated under both the processing and general trade routes so far has been 50 million mt, up 16.3% from 43 million mt in the same period last year.

Gasoline quota under both routes add up to 13.535 million mt, up 11.6% to date, while gasoil is up 8.6% at 18.664 million mt. Jet fuel quota is up 30.0% on the year at 17.795 million mt.

WAITING FOR SIGNALS FROM BEIJING

Beijing controls exports by oil companies via quotas. It was not immediately clear when the government will release the third round of export quotas under the general trade route.

In 2018, the third round was allocated on October 26.

Under the general trade category, state-owned refiners are free to export, regardless of whether the feedstock is domestic or imported crude. Unused quotas can be rolled over to the following quarter, but not to the following year.

Under the processing category, refiners have less flexibility and there are restrictions on the source of the feedstock and resale of the products.

Ironically, while other Asian refineries continue to mull over run cuts in the second half of 2019, due to poor refining margins, the additional export quota on refined products from China are likely to keep market sentiment pressured.

Although the announcement on China's oil product export quotas in recent years have allowed markets to price-in the impact of the potential outflows from China, the outflows themselves have led to softer market sentiment.

In July, South Korea's top refiner SK Innovation plans to cut runs at its refineries by 70,000-80,000 b/d due to poor margins, while Taiwan's Formosa Petrochemical Corp. has plans in place to reduce the run rates at its 540,000 b/d Mailiao facility by 50,000 b/d to 490,000 b/d.

Other Asian refineries are also contemplating similar cuts in the second half of 2019, trade sources said.

--Jonathan Nonis, jonathan.nonis@spglobal.com

--Analysis by Daisy Xu, newsdesk@platts.com

--Edited by Norazlina Juma'at, norazlina.jumaat@spglobal.com