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China's domestic crude production in June rose 7.1% year-on-year to 17.44 million mt or an average 4.26 million b/d, according to output data from the National Bureau of Statistics released Wednesday.

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This was the highest daily output since November 2010, when production averaged 4.3 million b/d.

Crude production was also 1.7% higher than in May on a b/d basis.

Natural gas production in June rose 12.6% year-on-year to 8.85 billion cubic meters, according to the data.


In the downstream, gasoil production showed positive growth for the first time following two previous consecutive months of contraction on weak macroeconomic growth. Gasoil output by refiners rose 3.4% year-on-year in June to 13.96 million mt. Gasoil's yield as a percentage of total refinery runs averaged 35.26% in June, compared with 37.77% a year earlier.

Other transport fuels showed robust expansion, with gasoline output rising 15.3% year-on-year to 8.04 million mt and jet/kerosene production surging 21.4% year-on-year to 2 million mt.

FUEL OIL PRODUCTION CONTINUES RISE

Fuel oil production in June jumped 35.2% year-on-year to 2.2 million mt, although this has been attributed more to accounting issues than actual consumption, particularly considering that traders have said demand this year has been weak because of the slowing economic growth.

Besides bunker and shipping fuel, a significant portion of fuel oil in China is used by independent teapot refiners in Shandong and Guangdong provinces as feedstock to produce higher-value oil products.

In the past, these independent refiners routinely reported their production of fuel oil as asphalt, in order to evade consumption tax -- asphalt is exempt from the consumption tax, which applies at a rate of Yuan 812/mt ($131/mt) on fuel oil.

Since the start of this year, however, the government has moved to close a tax loophole to clamp down on this false reporting, leading to the inflated fuel oil production numbers this year, according to analysts at Beijing-based consultancy 3E. Fuel oil's yield in June was 5.55%, compared with 4.55% in June 2012.

"Small local plants that were capable of switching operations [to produce] fuel oil and asphalt produced fuel oil [in] the name of asphalt to evade the tax," 3E said in a report last month discussing this phenomenon.

"In fact, the fuel oil market in China has gone rather sluggish with poor demand, built-up inventories and falling market prices, while the weakness of the light-end refined product markets...[have extended] into the entire oil market," 3E said.

However it said there was scope for some actual increase in fuel oil production this year because of refining capacity expansion across China.

Additionally offshore crude output -- which is mainly heavy -- from the Bohai Bay has increased significantly since late 2012, prompting China National Offshore Oil Corp. to raise run rates at its heavy-crude processing units.


--Song Yen Ling, yenling.song@platts.com
--Edited by James Leech, james.leech@platts.com