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OIL SPECIAL REPORT - IMPACT OF CHINA’S OIL CRACKDOWN

By Yaw Yan Chong

Director, Oil Research
Refinitiv

Summary

China has cracked down on excessive fuel production, both to manage over-the-top output of refined products, particularly
from its private refiners, as well as to meet its climate targets by 2030.

Snapshot
To this end, it has imposed the following measures:
• Impose punitive import taxes on materials that are used mostly by private refiners to blend diesel and gasoline, or
as alternative feedstocks for their plants. The taxes that came into place mid-June are for bitumen mixture, which
is used as alternative refinery feedstock by refiners who do not have crude import quotas, light-cycle oil (LCO),
used for diesel-blending, and mixed aromatics, used for gasoline-blending.
• Cut crude import quotas in its second tranche offering to 35.24 million mt, down from 53.88 million mt for the same
tranche last year, but the total quotas for both tranches remain broadly steady on-year at 157.83 million mt for
2021, versus 2020’s 157.71 million mt.
• Stop the trading of crude import quotas to private refiners who do not have it. The government ordered a unit of
state-owned PetroChina to stop doing so, and removed three senior executives of its trading arm, ChinaOil,
including its president.
• Expect to also lower its second tranche export quota, with 86.55% of its first tranche of 29.47 million mt already
consumed by June.

Impact
The ban on the trading of crude import quotas is expected to remove 12-16 million mt/year of crude imports, or about 2-3%
of 2020’s total imports of about 540 million mt, which the private refiners normally buy from counterparts who have excess
quotas.
Likewise, the imposition of taxes on bitumen mixture feedstocks, which averaged at 1.91 million mt/month between May
2020 to April 2021, LCO and mixed aromatics will curb imports, thereby limiting the capacity to produce diesel and
gasoline, including by blending, a common practice among the private refiners.
The ban and taxes on bitumen mixture will drive the private refiners to alternative feedstocks, mainly straight-run fuel oil,
which is also taxed, leading to higher costs and lower margins. On top of this, without cheap blendstocks such as LCO and
mixed aromatics, their ability to produce diesel and gasoline will be further curtailed, leading to lower output overall.
However, domestic demand remains strong, and needs to be met by processing without blending, meaning that the
country’s refineries, particularly by the state-owned majors, need to run harder. This is reflected by record-high runs for
June, at 94.6% of its 15.6 million barrels-per-day (bpd) capacity and above-average yields for diesel and gasoline,
respectively at 13.25 million mt, its highest in 10 months, and 13.19 million mt, a historical high.
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China Refinery Runs vs 5-year average

100.00% 94.63%
95.00% 90.16% 90.30% 92.02% 91.68%
91.33%
90.00% 91.57% 90.69%
91.68% 89.69%
85.00% 90.81%
80.00%
75.00% 79.42%
70.00% 72.22%
65.00%
201520162017201820192020 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2021 Feb Mar Apr May Jun
Jan Jan

Runs (% Cap) 5-year average

China Product Output

15,108,000
16,000,000
13,841,500 13,251,000
14,000,000

13,185,000
12,000,000
11,814,417
10,000,000 12,630,136 12,380,000

8,000,000

6,000,000
4,391,167 4,319,000
4,000,000
4,118,000
2,424,000 3,678,000
2,000,000
201520162017201820192020 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2021 Feb Mar Apr May Jun
Jan Jan

Gasoline 2019 Benchmark Jet-Kero 2019 Benchmark Gasoil 2019 Benchmark

June diesel exports hit an unexpected above-average of 2.36 million mt, but we believe that the incremental volumes have
come from brimming inventories in the country and drawn by recovering margins for the product, reflected by the front-
month crack spread between 10-ppm gasoil and Dubai crude that has averaged at a post-pandemic high of $8.36/bbl.

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Singapore 10-ppm-Dubai cracks

The large diesel inventories resulted from more than a year of over-the-top crude imports that averaged at record-highs of
11.3 million bpd for May 2020 to March 2021 and on high refinery runs of 90.85% during the same period. The fall in crude
imports in Q2 2021, to 9.9 million bpd, is due mainly to seasonal maintenance, though runs averaged higher at 91.67%, led
by June’s record-high of 94.63%, as the turnaround season ends.

China Crude Imports (bpd)

14,000,000 11,295,955 12,940,647 11,797,200
13,000,000 11,727,135
12,000,000 2015
9,820,368
11,000,000 9,647,263 2016
9,766,147
10,000,000 2017
9,000,000
2018
8,000,000
2019
7,000,000
6,000,000 9,058,874 2020
5,000,000 2021
4,000,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

In contrast, gasoline exports were at a 7-month low of 1.45 million mt for June, amid margins that are stronger than diesel’s,
reflected by the front-month Singapore 92-RON-Brent spread that averaged at $8.48/bbl, its highest month-average since
March 2018, signaling that Chinese refiners are barely producing enough to meet domestic needs.

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China Gasoline Exports (mt)

2,500,000

1,889,989 2015
2,000,000
1,858,394 2016
1,391,248
1,500,000 2017
2018
1,000,000
2019
500,000 2020
2021
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Refinitiv Oil Research expects exports for diesel and gasoline to fall sharply for July, notionally assessed at just 280,000 mt
and 84,000 mt at mid-month, well below their respective year-to-date averages of 2.17 million mt/month and 1.56 million
mt/month, and for the near term.
The downside to crude imports, however, are expected to be limited by the addition of 720,000 bpd of new refining
capacities, of which 400,000 bpd from private refiner Zhejiang Rongsheng Petrochemicals has already come online, taking
its total plant capacity to 800,000 bpd. The remaining 320,000-bpd, from a new plant belonging to another private refiner
Shenghong Petrochemicals, is expected to come online in Q3.
These new capacities, however, will add little to the diesel and gasoline pools as their primary yields are petrochemicals,
which account for over 50% of the output.
• Final Analysis
Refinitiv Oil Research believe that China’s crude imports will average steady-to-higher versus last year’s average of 10.78
million bpd for 2021, with the addition of the two new refineries. Assuming they run at 90% of capacity, that’s an additional
648,000 bpd of crude demand, versus a potential fall of 12-16 million mt (241,000-320,000 bpd) due to the ban on the
trading of crude import quotas, bringing the incremental demand at an average of about 368,000 bpd. Accounting for last
year’s over-the-top crude imports, which were largely stockpiled, the average by end-2021 could be steady versus 2020.
It is unlikely that the market will see anywhere near the same level of stockpiling this year, given the high-price
environment, that has seen front-month Brent stay above $70/bbl since the start of June, and a steeply backwardated 48-
month forward curve at over $14/bbl between the front- and back-month that discourages storing.

In contrast, we believe China’s exports of diesel and gasoline will be sharply under 2020’s average levels of 1.64 million
mt/month and 1.27 million mt/month. Already, for this month, refiners are limiting exports due to a fast-dwindling export
quota, which has seen 86.55% consumption by June and amid expectations of a lower second tranche.

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We believe that the loss of refinery feedstocks, notably bitumen mixture and import-quota traded crude, will not be fully
compensated by straight-run fuel oil. Reflecting this, China’s overall fuel oil imports have remained steady for June and
July, at about 1 million mt for each month, steady versus the 2020 average of 1.06 million mt/month, though it is likely the
proportion of straight-run fuel oil has increased, versus the cracked marine fuels grade.
This will be at least a near- to medium-term scenario, if not a long-term one, that could force some of the smaller private
refiners out of business, leading to reduced output from the country as a whole – which is exactly the government’s
objective.
(For queries, email: yanchong.yaw@refinitiv.com or call +6568703851, Reuters
Messaging: yanchong.yaw.thomsonreuters.com@reuters.net) OR contact Refinitiv Oil Research - Oil APAC at oilanalytics@refinitiv.com

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