China’s oil market is generally oversupplied at present, C1’s survey found. The government gave priority to oil supply safety for the sake of Beijing Olympics. In the last several months, it urged the two top state-run refiners to stabilize domestic distillates production, hike imports while cut exports to secure domestic supply. However, entering August, the country has begun to show denting demand for oil replenishments. It is estimated that the oversupplied market would face corrections in its fundamentals after the international sports games. By September-October, the country may return a net gasoline exporter while slash gasoil imports.

In spite of the government’s loose hand, fuel oil and LPG – which are market-oriented products – failed to escape from the overplus. Though imports almost kept at year-low before the Olympics, available supply was still rather high since domestic yields hovered high over peak refinery utilizations by both majors and independent refineries. C1 believed LPG imports will remain weak after the Games. Fuel oil demand from independent refineries would likely to rebound with the two oil oligarchs cutting their crude supplies under third-party processing terms.

High available supply amid buying binge in Q2

After converged buying in the second quarter of this year, the country’s distillates market was seen in surplus by end July, C1 found. To ensure domestic supply, Chinese government exempted Sinopec and PetroChina from value-added taxes on distillates import in the quarter. That buoyed up gasoil and gasoline imports despite hefty import cost on surging international crude benchmarks. Upon the government’s request, the two state-owned monopolies also enhanced third-party processing cooperation with Shandong-based independent refineries. They promised the latter with 2.3-mil mt of crude supplies in April-July, and bought back 1.6-1.8-mil mt of distillates, with monthly average supply at above 400,000mt.

Apart from the outsourcings, the two top refiners kept steady refinery runs in their underlying refineries as well. Operation rate averaged at 83-84% in June, basically on parity with the level one year before, in spite of nearly doubled crude futures. Crude throughput grew 5-6% year on year in the second quarter, slightly lower than the 6-7% growth recorded in the same period of last year.

Available gasoline supply during April to July of 2008 was at 20.4-mil mt, shaving off the previous stocks, C1’s data showed. Monthly availability is at 5.1-mil mt, 12% higher than the same period of 2007. During the meantime, gasoil availability is at 47-mil mt, with monthly level at 11.75-mil mt, sharply up 12.6% from one year before. The growth rate is much higher compared with an average annual rate of 6-8% in recent years.

In the northern regions, supply was seen in overplus, local traders told C1. Demands were curbed by traffic controls and environment checks in Beijing and nearby areas, traders based in North China complained. Distillates stocks in Northwest China – a major distillates exporter - were also lofty as outflows towards North China were blocked amid bumpy transportations, local traders denoted.

Buying fever fading in Aug

With domestic market in ample supplies, the oil duopolies began to slow down their buyings in August. Their plans for gasoil and gasoline imports in the month were heard to slump by 25% on month to around 850,000mt. Gasoline net imports will be halved to about 150,000mt, while gasoil net imports will drop by almost one third to 450,000mt. The big two also slashed distillates outsourcings in domestic market. Sinopec controlled its outsourcing volume in the month within 269,000mt, down 18.7% on month. While cutting the purchase price by Yuan 50/mt, the top refiner also forbid outsources by its subsidiaries outside Jiangsu, Zhejiang, Shanghai, Hebei and Guangzhou, company sources told C1. In addition, their interests in third-party crude processing cooperation with independent refineries based in Shandong also weakened, revealed a refinery source based in Dongying – one of the cradles for independent refineries. The two giants’ crude supplies to them almost plunged by a half in August, the source said. In Dongying, only Shandong Lijin Petrochemical and Shtar Science & Technology Group get such crude supplies in the month by far. And the volume slumped around 78% on month to less than 100,000mt. The refinery source attributed the cut to comfortable domestic supply and diving international crude benchmarks since late July.

Market to return balance after Sep

C1 foresaw that the oil market will restore supply and demand balance after September since the government would by then lift its strong interference with end of Olympics. If crude futures keep its recent downward corrections, operation rates of refineries under the two monopolies would remain steady thanks to better margins. The big two will show lower demands to outsource distillates from independent refineries. That would call an end to their third-party crude processing cooperation in the latest five months. The break in crude supply may slightly whet the appetite for imported straight-run fuel oil from Shandong-based independent refineries. Once their utilizations drop from the previous year-high, residue and LPG supplies will drift lower, refinery sources in Shandong said.

Gasoline market would begin to show sustained weak demand, entering September, an off-season. Fuel demand from private sedan cars will be weak since the market rumored the government would start to levy fuel tax after the Olympic Games. “It is a proper time to collect fuel tax under the backdrop of weakening crude,” agreed a source with Sinopec’s Beijing headquarters. However, demand in Beijing and surrounding areas would bounce up sharply in September with the lift of traffic bans.

Gasoil consumption may weaken as well amid slower economic development. Industrial users’ consumption of the product has shrunk significantly, especially due to industrial transfer in Pearl River Delta and Yangtze Delta this year, C1’s survey found. But demand from transportation sector would rebound with smoother on-land logistics in northern China and from north to south.