BEIJING, Aug 18 (Reuters) – China’s subdued economic growth in 2023 as the recovery from the COVID crisis is underwhelming has clouded the demand outlook for diesel fuel, the oil product that is the lifeblood of the economy, and the Paved the way for continued stable exports.
Lower forecasts for China’s diesel consumption illustrate once again the struggles of the world’s second largest economy and oil consumer to regain its footing after the pandemic. With machines idle, construction activity slowing and falling exports curbing production, diesel demand is likely to fall.
Rystad Energy lowered its forecast for China’s diesel demand for July-December this year to 3.81 million barrels per day (bpd) from an earlier forecast of 3.9 million barrels per day (bpd), although the new forecast was 3 .8% higher.
The International Energy Agency (IEA) in its August oil market report expects China’s gas oil consumption to fall by 150,000 bpd in the second half of the year from second quarter levels.
“Diesel demand is still growing, but at a slower rate than expected,” said Lin Ye, a Beijing-based downstream analyst at Rystad, citing the battered real estate sector and deteriorating trade environment.
According to official data, diesel represents the largest amount of fuel produced by Chinese refiners, accounting for 4.3 million bpd of fuel production in July, or 28.2% of total throughput.
Analysts have also lowered their forecasts for full-year diesel consumption amid a string of disappointing Chinese economic data. Since March, the IEA has lowered its 2023 forecast by 127,000 bpd. Rystad reduced its estimate by 94,000 bpd this month.
The weakness is expected to continue into next year, with the IEA in June forecasting that demand in 2024 would rise just 50,000 bpd, or 1.4%, higher than 2023.
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With Chinese refiners still operating at high speed, the oversupply has spilled into inventories. According to China-based consulting firm Longzhong, diesel stocks rose 9% from January to 15.96 million tons in June. This is similar to the level seen in the third quarter of last year when China imposed sweeping COVID lockdowns.
“The tepid macro economy and reports of rising inventories suggest that much of the increase in refinery diesel and gasoline production has gone into domestic product inventories,” the IEA said.
A surge in Chinese diesel demand earlier this year, fueled by resurgent road freight traffic in the first quarter, has lost momentum.
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The challenges facing China’s refineries reflect deeper systemic problems.
The country’s real estate sector, which typically consumes large amounts of diesel for construction equipment and machinery, was the primary constraining factor in demand growth, with new home construction falling 71.7% in June from the monthly average in 2019.
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China’s exports slumped 14.5% in July, posting the fastest decline since the pandemic began in early 2020, customs data showed. This impacted the diesel-hungry manufacturing sector, where sentiment deteriorated for several months after an initial recovery from the COVID-19 outbreak.
“Weak external demand due to the global economic slowdown (and) a slower-than-expected recovery in manufacturing is expected to continue to weigh on diesel demand,” said Xia Shiqing, oil and chemicals adviser at Wood Mackenzie.
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Short-term exports could remain stable
Chinese refiners have taken advantage of high diesel profit margins in Asia by more than tripling their overseas exports of the fuel in H1 compared to 2022 levels.
However, further exports depend on the granting of new export quotas from Beijing.
August diesel exports are estimated at 650,000-800,000 tons, down from July’s estimate of 1 million tons, data from consultancy Longzhong and China-based trade analysts showed.
So far, China has granted 27.99 million tons of oil product export quotas for 2023. According to Reuters calculations, based on official government export data and estimates by consultants and analysts for July and August deliveries, refiners have exhausted 98% of issued quotas, with 33% of quotas used for diesel exports.
Beijing is expected to issue new quotas for the remainder of 2023. Mia Geng, head of China oil analysis at consultancy FGE, predicts up to 8 million tons of new licenses by September.
“Although it is possible that the government will allow more to give refiners room to increase their exports in (fourth quarter),” she said.
Reporting by Andrew Hayley in Beijing and Trixie Yap in Singapore; Edited by Christian Schmollinger
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