China Q2 refining margins outlook bearish amid COVID-19 outbreaks, crude uptrends

SINGAPORE (ICIS)–China’s second quarter refining margins outlook is bearish as a scattered resurgence of COVID-19 across the country is expected to weaken domestic consumption, while high global crude prices due to supply concerns will translate to high feedstock costs.

Gasoline demand in south China has been weakened as lockdown measures have impeded vehicle movements and gasoline cargo deliveries, a source from a state-owned oil sales company said.

“Ron-92 gasoline offer price was CNY250/tonne lower today, but that failed to find buyers,” the source said.

Jet fuel demand is also expected to weaken as the local outbreaks are likely to discourage cross-provincial movements, as quarantine requirements are known to have kept people from travelling.

China’s Ministry of Transport announced on 14 March that train and waterway tickets purchased before 15 March will be fully refunded without penalty.

Market players expect more domestic airlines to offer penalty-free refunds following China Eastern Airlines’ announcement on 14 March that it would fully refund domestic air tickets for flight dates between March 14 and April 17, 2022.

A privately-owned refiner in Shandong province said their oil products sales have fallen by half, compared with one week ago before new cases surged across the country.

ICIS is projecting the average monthly Brent crude prices to hover above $100/bbl from March to November as sanctions on Russia are unlikely to be lifted immediately even if peace talks lead to an end of the Ukraine war, hence crude supply is expected to remain tight for balance of the year.

Sanctions imposed on Russia in the wake of the Ukraine war have caused payment and logistics problems for Russian cargoes, and hence created a shortfall in global crude supply.

Based on existing practices, China’s National Development and Reform Commission (NDRC) will cut refining margin rates considered in setting the price ceilings for domestic oil products, when the crude basket price hits $80/bbl.

The crude basket price, a basis for NDRC’s price ceiling adjustments, has been at or above $80/bbl since 12 January, according to ICIS data.

Lockdown measures have been rolled out across Chinese cities since last week to curb the resurgence of COVID-19, including key financial hub, Shanghai, and northeast China’s Jilin province where agriculture and vehicle manufacturing are pillar industries.

Restrictions have also been imposed in manufacturing and technology hubs Dongguan and Shenzhen in Guangdong province in south China to curb the outbreaks.

Guangdong province is China’s largest gasoline market, which on average accounts for around 10% of the country’s total gasoline consumption, according to China’s National Bureau of Statistics (NBS).

Shenzhen is the largest city in Guangdong province while Dongguan is the fourth largest, in terms of last year’s GDP, according to the NBS.

Gasoil prices from Shandong independent refiners were at around CNY8,222/tonne on average on Tuesday, down by CNY95/tonne from the previous day, and their 92-Ron blending gasoline prices decreased by CNY123/tonne over the same period to around CNY9,634/tonne on average.

The gasoline market in Shandong province is widely seen as a barometer for the country’s gasoline price trends due to the strong presence of privately-owned refiners in that market.

Privately-owned refiners are market driven hence their pricing decisions are more responsive to domestic and global events, whereas state-owned refiners are more focused on ensuring supply to meet their energy mandates.

ICE Brent May futures fell by $6.18/bbl from the previous day’s closing rate to $100.73/bbl at noon on 15 March, as demand concerns surfaced following China’s efforts to curb its largest COVID-19 outbreak in two years.

Analysis by Chow Bee Lin, Yu Yunfeng, Jean Zou, Patricia Tao, Ajay Parmar and Floria Dai

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