China cuts fuel oil demand by 15,000 b/d: Platts Analytics
Gasoil price surges as supply reduction outpaces demand fall
Power shortage continues to weight on Q4 gasoil demand
China’s industrial fuel consumption could take a hit in the near term, as construction, manufacturing and transportation sectors were forced to reduce their operation rates after multiple provincial governments rolled out electricity rationing measures, an analysis by S&P Global Platts showed.
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More than a dozen Chinese provinces have imposed electricity rationing mandate to critical industrial sectors in recent weeks, in an effort to conserve fuel ahead of the peak winter heating and power demand season, while higher coal and gas prices have limited power generation capacity.
The power rationing measures were also aimed to get industries to meet energy consumption targets towards the end of the year. Market analysts expect gasoil demand to bear the biggest brunt of the power conservation mandate.
With key industrial activities widely expected to slow down amid a shortage of power supply, gasoil demand could take the biggest hit among middle and heavy distillate fuels in September, with analysts lowering their demand estimates for the fuel by around 100,000 b/d.
“We could see as much as 100,000 b/d of gasoil demand cut from our original September projection, and another 80,000 b/d reduction if the severe power shortage continues in October,” Sun Jianan, analyst at S&P Global Platts Analytics, said and added that the downward adjustment to fuel oil demand was around 15,000 b/d- 20,000 b/d over September-October.
A total of 19 provinces have been warned by National Development and Reform Commission for excess consumption of power and energy on Sept. 17. The affected regions include Guangdong province in the south, Jiangsu and Shandong in the east and Liaoning province in the northeast.
The electricity rationing measures have diverted power supply away from some of the sectors deemed less important in order to feed more critical industrial activities, as well as residential consumption. However, some confusion over designating priority sectors along production value chain has created imbalance in the manufacturing system and forced many industries to cut utilization rates.
“On oil particularly, combined demand from industrial and transport sectors account for over 70% of overall gasoil usage in China, while industrial sector consumes over 15% of China’s fuel oil. We have taken into account demand impact in the 19 provinces warned by the NDRC,” Sun from Platts Analytics said.
“We cut our total oil demand estimation by 200,000 b/d in September due to the power supplies control and COVID-19 resurgent in Fujian province. About 100,000 b/d of the reduction goes to gasoil,” a Beijing-based analyst said
Limited gasoil demand from power generators
Analysts and market sources believed that the emerging gasoil demand for power generation from the affected factories will be limited to offset the reduction.
“Not all industry users have backup gasoil power generators. Most of them rely on general power grid which has been providing stable supplies for a few years. Moreover, backup gasoil-fire power generators are designed for emergency usage and are unable to support a factory to run at its full capacity,” Sun added.
“They may be able produce electricity with gasoil on their own to keep the factories, plants running, but the cost is not affordable for everyone,” a source with China Southern Power Grid said.
Wholesale price of National 6 gasoil, almost equal to Euro 6, in Guangdong jumped Yuan 1,600/mt ($33.26/b), or 27.5%, in two weeks to Yuan 7,400/mt on Sept. 28 as supply reduction outpaces demand fall while tax costs have risen, according to a trader with PetroChina.
China’s gasoil output from refineries declined 3.5% on the year to 3.14 million b/d in January-August, according data from National Bureau of Statistics. The volume is expected to fall further as China extends crude throughput cuts in September from the level of 13.8 million b/d in August, Platts and NBS data showed.
The country’s authorities have also tightened tax collection which has raised producers’ tax payment for gasoil.
In addition, the new consumption tax implemented in June on light cycle oil, along with bitumen blend and mixed aromatics, has led to a steep drop in imports of LCO, which is typically used as a cheap off-spec alternative to gasoil in power generation.
LCO imports slumped to 128,175 mt in August, compared to a record high of 2.08 million mt in April, customs data showed.
Looking forward, gasoil demand is expected to recover slightly in the fourth quarter, which is a typical peak season for the fuel, but the volume will be capped as power supplies are expected to remain tight.
“Gasoil demand will recover from the September level as the harvest season is here for more gasoil consumption in agriculture, while shifting gasoil specification in northern China in winter also creates demand typically,” the Beijing-based analyst said, but added that power generation will still take a hit from tight coal and gas supplies.