Asia diesel profits wane as China boosts exports, market adapts to Russia

The profit for making diesel in Asia has dropped to the lowest in almost a year, a sign that the market is adapting so far to the European ban on imports of the transport fuel from Russia.

The profit margin, or crack, on producing a barrel of gasoil, the building block for diesel, at a typical Singapore refinery slipped to $22.05 a barrel on Feb. 17, the lowest since March 16 last year.

The crack is down 43% from its peak so far this year of $38.89 on Jan. 25, and is also 69% below its record high of $71.69 from June last year, reached in the aftermath of Russia's Feb. 24 invasion of Ukraine.

Rather than being driven by concerns over the potential loss of Russian shipments of diesel, the market in Asia appears more reflective of ongoing strength in diesel exports from China and India.

China is expected to export about 2.4 million tonnes of diesel in February, equivalent to about 643,000 barrels per day (bpd), according to data compiled by Refinitiv Oil Research.

This would be up from January shipments of around 1.78 million tonnes and 2.32 million in December.

China's vast refining sector has been ramping up throughput in order to produce more gasoline as domestic demand rebounds in the wake of Beijing abandoning its strict zero-COVID policy, which had led to a slowing economy.

However, diesel demand is lagging the growth in gasoline consumption as it takes more time for construction projects to get going.

This means China's refiners are likely producing more diesel than domestic requirements, meaning they are likely to export the surplus.

While the profit margin on diesel is shrinking, it's still strong by historic standards, having rarely traded above $20 a barrel between 2014 and the end of 2021.

However, it's worth noting that gasoline in Asia is currently treading a different path to diesel, largely because China is exporting less.

China exports of gasoline have been declining in recent months as domestic demand recovers, and Refinitiv has tracked only about 300,000 tonnes so far in February, well below the 625,000 tonnes in January and December's 1.9 million tonnes.

The profit margin on producing a barrel of gasoline from Brent crude in Singapore ended at $11.94 a barrel on Feb. 17.

While this is below the peak so far in 2023 of $18.32 a barrel, the crack has been on an uptrend since its 2022 low of a loss of $4.66 a barrel on Oct. 26.

India exports 

The profit for making diesel is also been hit by ongoing strength in exports from India, which is expected to ship about 2.0 million tonnes of diesel in February, similar to January's 2.01 million, although the daily rate is likely to be higher given February only has 28 days.

The impact of the European Union ban on imports of Russian oil products, which came into effect on Feb. 5, can be seen in India's exports, which are increasingly shifting to the West of Suez markets in Europe and Africa.

Almost 88% of India's February diesel exports are heading West of Suez as refiners on the country's west coast take advantage of the gap left by Russian diesel exiting Europe.

It also appears that Russia is still able to find buyers for its diesel, despite losing its biggest market as Europe used to buy about 500,000 bpd of Russian diesel prior to the war in Ukraine.

One new avenue of trade is Middle Eastern countries such as the United Arab Emirates and Saudi Arabia buying Russian diesel, most likely to use in their domestic markets, thus allowing them to export locally-produced fuel that is compliant with European and other Western sanctions.

Middle East imports of Russian diesel are expected to hit a record high of 338,000 tonnes in February, or almost eight times the pre-invasion average of around 43,500 tonnes a month, according to Refinitiv data.

Overall, the message from physical oil products markets is that they are able to adapt and cope with the disruptions caused by the re-alignment of Russian exports.

This is similar to what has already been seen in the crude oil market, where China and India effectively replaced Europe and other Western buyers, and were happy to take the discounts offered by Russia as Moscow sought to keep earning revenue from its energy exports.

The question is whether all the shuffling of the trade in oil products like diesel cut the flow of cash to Russia by enough to be deemed a success by Western governments, or whether the real beneficiaries are the traders and refiners who adapt best.