China exports gasoline to Mexico, Nigeria amid overflowing output

China will ramp up gasoline exports in July and August to near record levels with cargoes moving to Mexico and Nigeria as refiners seek outlets for their fuel amid a wave of new production and slowing domestic demand.

China’s refineries, led by PetroChina, the country’s second-largest, will export about 1.5 million tonnes of gasoline a month in July and August, said two senior oil traders with knowledge of China’s gasoline exports. That is up from June exports of 1 million tonnes and near the record of 1.69 million tonnes exported in March, according to Chinese customs data.

The surge in Chinese shipments will fill a supply gap caused by refinery outages in the United States and the Middle East but are likely to accelerate a plunge in Asian gasoline margins, which have dropped 50% since July 12, when they clawed back to a three-month high.

The export surge is a result of the start up of two large-scale refineries owned by Hengli Petrochemical and Zhejiang Petrochemical that will each add about 4 million tonnes per year of new gasoline output when fully operational.

The surge will reverse the trend of falling gasoline exports in 2019, for the first half of 2019 they are down 9% from the same period a year ago.

“Gasoline was overflowing (in China) as Hengli shocked the market...companies took the advantage of stronger demand in Latin America and West Africa,” said one of the traders.

PetroChina was granted gasoline export quotas of 4.7 million tonnes in the second batch of quotas issued in May, more than half of the quotas given. As a result, the company is placing cargoes to Mexico, Chile and Nigeria, according to the traders.

“Gasoline surplus in China is exacerbated by slowing demand growth, given weakening consumer confidence as the trade war continues, reflected also in slumping car sales,” said Michal Meidan, director of the China energy programme at Oxford Institute of Energy Studies.

Chinese refiners have loaded 1.2 million tonnes of gasoline for export as of July 23, after a record 1.6 million tonnes in June, according to data from Refinitiv.

One PetroChina-run plant, West Pacific Petrochemical Corporation, sold 900,000 barrels of gasoline to Mexico in July, in three different shipments.

China’s refiners have tried to lower the so-called diesel/gasoline production ratio to produce less diesel and more of the motor fuel, causing the excess of gasoline, said Wang Yanting and Shi Linlin, analysts at Shandong-based consultancy JLC.

The shift in production was aimed initially at easing the overhang of diesel as demand for the industrial and truck fuel has fallen amid a slowing economy.

Top refiner Sinopec, for example, squashed that ratio to a historic low to 1.01 in the first quarter this year, versus 1.33 in the same period in 2015, according to company reports.

As a result, China’s gasoline output in the first half of 2019 rose 2.9% from a year earlier while diesel dropped 7.8%, according to the National Bureau of Statistics.

Gasoline demand growth is also sliding as Chinese automobile sales, consisting mainly of petrol-consuming passenger vehicles, fell for a 12th month in June, with 2019 annual sales set to fall for the second year in a row.

Seng-Yick Tee, senior director at consultancy SIA Energy, forecasts China’s gasoline demand to rise 5.4% this year, the slowest pace since 2015, as the falling auto sales reduce consumption.

As a result of the petrol glut, plants that make mixed aromatics, petrochemicals used to raise the octane rating in gasoline, in eastern China’s Shandong province have closed.

Shandong-based consultancy JLC estimates about 30 plants with annual output of 5 million tonnes have shut for months this year as demand for mixed aromatics has declined.

“Our plant was losing money in a big way...We wish we had shut down earlier,” said a mixed aromatics plant manager in the city of Zibo, Shandong, which has closed its 8,000 barrels per day facility since March.

Higher fuel exports from China loom as the major threat to an otherwise fairly positive outlook for crude oil refiners across Asia, who have seen margins recover ahead of significant changes to the shipping industry.

China has raised quotas for the export of refined products for 2019, allocating a third batch totalling 6 million tonnes, three traders told Reuters on Wednesday.

This brings the total allowed for the year so far to 48.15 million tonnes, up from 43 million tonnes for the same period last year.

China allocates export quotas in batches throughout the year and has steadily been increasing these since 2015 when refining capacity started to exceed domestic demand. There is no guarantee that all of the quotas will be used. But it’s worth noting that China’s exports of refined fuels were 32.52 million tonnes in the first half of the year, up 7.3% from the same period in 2018.

Reuters