MNI Commodity Weekly: China Set to Reverse Gasoil Flows While Its Economy Rebounds

China Set to Reduce Gasoil Exports March While Domestic Demand Rebounds: Chinese gasoil exports are forecast to tumble in March after an extended period of soaring outflows. India and Russian flows are likely to fill the gap, whilst Chinese demand indicators look supportive for buoyant oil markets this year.

Some Asian LNG Demand To Recover This Summer - Significant Unknowns Remain: Current gas spreads still encourage US gas flows to Europe over Asia but spreads have narrowed in recent weeks as there has been increased appetite from south Asian countries amid lower prices. Spreads for this summer are not yet giving a clear direction as Europe needs to refill its gas storages, while Asian spot demand is also expected to recover this summer.

Oil Markets: Crude has held within a 4$/bbl range over the last week as the market continues to balance economic slowdown concerns against Chinese demand recovery and Russian oil supply risks.

Gas Markets: European gas prices have again set recent lows this week despite the forecast of a cooler end to the winter heating season in Europe. The forecast of colder weather across the US and the return of Freeport has helped front month US Henry Hub gas recover from its lowest since August 2020.

China Set to Reduce Gasoil Exports March While Domestic Demand Rebounds:

China has flooded the Asian market with refined products in recent months as Beijing issued bumper export quotas last year to boost refining activity and support its economic recovery but industry forecasts for March suggest loading schedules for gasoil could collapse.

• Consultant Oilchem put out a client note this week that Chinese gasoil exports are set to fall by 80% this month versus February. It forecast China’s gasoil outflows at 390,000 tons in March vs a February plan of 1.973m tons.
• China's efforts to flood the market with oil products since late last year has helped soften Asian gasoil margins, lessening the incentive to export volumes alongside its domestic consumption rising post lockdowns. News of its intent to reduce gasoil exports this month have helped to support margins somewhat.
• Energy Aspects released a client note late last month about expectations of a Chinese oil product export reduction this month but forecast gasoil loadings higher at ~600,000 tons.
• EA’s figure would return Chinese exports to the low range seen from 2H 2021 to 1H 2022. The consultancy forecasts Asia’s markets will become more reliant on gasoil/diesel exports from India’s surging refinery sector that is taking advantage of cheap Russian barrels.
• Russian diesel flows are also directing towards Asia in higher volumes following Europe’s Feb 5 ban which will support volumes short term with well over 24 million barrels of its diesel already on the water - though new markets in North Africa, Brazil and the Middle East are receiving some of those volumes. It remains to be seen if they can place it all or a higher percentage ends up as floating storage - around 7% of it is so far according to Kpler.
• In an interview this morning, Goldman’s Jeff Currie still forecasts that the Chinese economic rebound this year will see oil above $100/bbl by Q4, with China swallowing up global spare capacity between now and then. He referred to the country’s recovery as ‘A-ok’ last week.
• On the demand side of thing, Chinese vehicles numbers on its express highways are consistently 20-30% higher than 2019 and subway ridership has rallied to 110% of pre-pandemic levels.
• Domestic flight schedules remain high after the Chinese New Year holiday, while international flights are set to increase after March as regulators approve schedule plans for the next two quarters.
• The Chinese manufacturing purchasing managers’ index rose to 52.6 last month from 50.1 in January, the National Bureau of Statistics said today. It was the highest reading since April 2012. A gauge measuring manufacturing employment rose to 50.2, the first expansion in two years.
• The above factors all signal China’s recovery is gathering steam, a boom for commodity markets, especially with Russia set to cut production by 500,000 bpd this month. Russia’s intent to announce cuts without OPEC+ approval leaves a lot of uncertainty for global oil supply in the months ahead. The market is also gauging whether Russia can maintain high energy flows to Asia over the longer term as the increased distances to market leave its fleet stretched, another bullish factor over the longer term as effective fleet capacity find itself ensnarled by longer voyages.

Asian LNG Demand To Recover This Summer - Significant Unknowns Remain:

European gas prices have remained at a premium to Asian LNG benchmarks which supported high LNG arrivals into European terminals this winter. However, current spreads for this summer are narrower as Asian demand is expected to recover, while the extent of the Chinese demand recovery on global LNG remains an uncertainty.

• Front-month TTF prices are currently holding a 0.21$/mmbtu premium over the JKM contract, down from 9.32$/mmbtu in mid-January suggesting increasing competition from Asian LNG buyers.
• Forwards spreads for the third quarter of this year are not showing a clear direction yet. JKM-TTF Q3 spreads stood last at -0.07$/mmbtu and have been ranging between -0.83-0.89$/mmbtu.
• Europe will look to refill its gas reserves this summer to achieve the 90% storage target by the 1 November. But stock levels well above the mid-term averages will leave Europe in a comfortable position at the end of the heating season. Europe is expected to attract 65% of the global flexible LNG supply (33bcm of gas) over the summer, up by 15 percentage points from last year to make up for the lack of Nord Stream flows this year.
• At the same time, Asian demand is expected to recover this summer but China’s appetite for spot LNG is expected to remain below historical levels.
• LNG inventories in Japan are set to start the summer at above-average levels following the mild winter and together with higher nuclear output limiting the need for LNG storage injections over summer. However, temperatures well above the seasonal norm during summer could spur additional demand. Japan’s LNG demand this summer (April-September) is forecast to decline to 28mn tons, 18% lower year on year.
• South Korea’s LNG demand is forecast to reach 18.1mn tons over the summer, 10% lower than a year ago due to higher nuclear and coal-power generation as well as lower stockpiling requirements this year.
• South Asian spot demand is expected to recover this summer from lows we have seen this winter - but volumes will be limited.
• Thailand’s spot LNG import growth this summer is expected to recover from last year amid lower domestic gas production and pipeline supplies from Myanmar. It leaves LNG as the only option to meet gas demand. Thailand’s LNG import demand is expected to rise by 14% year on year during summer to 5.3mn tons as a result if they can remain competitive with costs.
• India, Pakistan, and Bangladesh are all expected to see slightly lower demand this summer compared to last year despite the recent increased interest at lower prices. A further reduction in spot prices would likely be required to boost LNG spot consumption.
• India’s LNG demand is forecast to fall slightly summer-on-summer based as spot prices that are still above the affordable levels for Indian buyers, seen at roughly 9-12$/mmbtu. Indian LNG for this summer is expected at 10.2mn t, marginally less than last year. Further reductions in spot prices could boost spot LNG consumption in refineries, power and other industrial users.

source: Bloomberg

Oil Markets:

Brent crude has bounced between about 80.5$/bbl and 84.2$/bbl since 17 February. The market however remains cautious of the upside risk highlighted by a gradual closing of the Brent call-put skew and increasing Brent managed money net long positions.

• Recent data suggesting more resilient inflationary pressures are leading to further uncertainty over the peak of central bank rate tightening and the potential negative impact of global oil demand growth. Weighed against this is the ongoing recovery in China with an increase in manufacturing activity the latest sign for a potential pick up in oil demand in China this year.
• Prices are also supported by the expected cut of 500kbpd to Russian oil production in March despite surprisingly robust Russian output so far following the crude sanctions in December and refined product sanctions from early February.
• The crude forward curve remains in strong backwardation with the prompt time spread this week rallying to the highest since November. The longer dated spreads are also towards the higher end of the range seen so far this year. Current weak US demand still weighs on the WTI spreads with the prompt time spread trading in contango since November and the WTI-Brent spread still around -6.5$/bbl assisted by rising inventory levels at Cushing.
• Diesel and gasoline margins found support in the last week following the decline from mid Jan. Near term supplies could be tighter due to the US and Asia refinery maintenance seasons and potential for future Russian output disruption. Higher transportation costs with redirected oil flows spending much longer at sea adds to the price pressure to offset the weak near term demand and recent recovery in inventory levels.

Prompt Time Spread

source: Bloomberg

Gas Markets:

Cold weather over the first ten days of March is supporting TTF front month just above the lowest since Aug 2021 at about 46.4€/MWh from 28 February.

• Lower demand due to the warm winter and EU consumption reduction efforts have resulted in healthy storage levels which are expected to end the season over 50% full. Seasonal normal withdrawals until the end of March would bring EU storage to around 56% of capacity.
• Germany is targeting continued gas saving of at least 20% this year and the EU is considering continuing its voluntary 15% gas demand reduction target beyond March to help reach the 90% storage target by 1 Nov.
• LNG supply to Europe remains steady with JKM trading about flat to TTF and with the US netback still just favouring flows to Europe over Asia. Upcoming global LNG supply will be boosted by the gradual return of the US Freeport LNG export terminal in the coming few weeks. South Asian buying interest is also providing support and could increase further should JKM fall back toward historical levels below 10$/mmbtu from the current price just below 15$/mmbtu.
• Freeport have asked permission from FERC to progress to the full, commercial operations of the third and final liquefaction train. One liquefaction train has reached full commercial operations and the second is continuing through its restart activities. Pipeline feedstock deliveries to the terminal are up to just over a third of capacity with supplies averaging approximately 2.1bcf/d before the fire in June.
• US Natgas is up from below 2$/mmbtu on 22 Feb to around 2.7$/mmbtu but still well below the peak of nearly 10$ last August.

EU LNG Sendout

source: Bloomberg

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