Middle Distillate Tightness to Persist: Refinery Margins Expected to Remain Volatile and Elevated

Refined products: Middle distillate tightness to persist

Refinery margins have been volatile in recent months due to tight inventories and a number of outages over the summer. We expect margins to remain volatile and relatively elevated given the tightness in middle distillates, along with the lack of new refining capacity.

 

Volatile and elevated refinery margins likely to remain

Refined product markets witnessed significant strength over the northern hemisphere summer, which helped to drive refinery margins to their highest levels since last year. Strength was seen across the board, although it has predominantly been middle distillates which have pushed margins higher.

More recently, however, margins have started to give back a lot of these gains. Weakness has been largely driven by gasoline as we come to the end of the summer driving season. Middle distillates have also come under some renewed pressure more recently. The latest release of Chinese export quotas would likely have put some pressure on cracks.  

Longer-term, refined product markets remain vulnerable. Inventories are mostly tight and global refining capacity has remained largely unchanged since 2019, with new capacity offset by longer-term closures. This is happening at a time when demand continues to grow, leaving markets tight. While there is spare capacity in China, the ability for significantly more refined products to make it onto the world market is restricted by export quotas. This suggests that refinery margins are likely to remain relatively elevated and volatile for the foreseeable future.

 

China releases further export quotas

A delay in the release of the third batch of refined product export quota from the Chinese government initially provided some support to refined product markets. Uncertainty over when we would finally see this released and the volume of the third tranche were supportive. Recently, the government finally issued the third batch, which amounted to 12 million tonnes, more than the 10 million tonnes the market was expecting. This also means that export quotas released to date total 39.99 million tonnes, above the 37.25 million issued over the whole of 2022. The increase in refinery run rates this year has allowed for a higher quota allocation.

However, what is not clear is whether the government will release a fourth batch of export quotas. Much will likely depend on how domestic demand evolves over the remainder of the year. Even if we see further releases, it does not guarantee that further quotas will have to be used before the end of the year. As we saw last year, the government may allow some of these to be rolled over into early next year.

Higher export quotas have obviously translated into higher export volumes of refined products. Over the first seven months of the year, refined product exports totalled 36.62 million tonnes, up 46% year-on-year. Diesel exports have seen the largest increase with 8.4 million tonnes exported, compared to just 2.4 million over the same period last year.

 

China refined product export quota releases exceed 2022 levels (m tonnes)

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