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(Bloomberg) –
A fleet of oil tankers passing through the waters between China and South Korea transported giant volumes of a lesser-known fuel called light-cycle oil, or LCO, to Asia’s largest consumer of crude oil.
Nearly 800,000 tons of LCO arrived in China from its neighbor in July, peaking at least 3 years and more than double the monthly average in the first part of the year, knowledge intelligence firm Kpler said. The wave of activity, which seems to accelerate this month, is due to the charm and incentive to LCO, a low-quality petroleum product combined with diesel and fuel oil.
Chinese demand for diesel recovered as the economy emerged from blockades caused by viruses and interest in Korean LCO increased because it was less expensive than locally produced fuels that were not allowed to fall below the $40 equivalent of the barrel of crude oil due to government policy. A tax loophole that exempts imported LCO from the main tasks in finished fuels, on the grounds that it is also an uncooked petrochemical material, has also added to its appeal.
Meanwhile, South Korean refineries chose to produce more LCO because margins were higher than for other fuels in July, several investors said they asked to be known because they were allowed to speak publicly.
In Singapore, diesel crack spreads were less than part of their five-year seasonal average last month, as complex processors struggled for profit. Earlier this month, South Korean shipments for the September cargo were traded with a $3 to $6 premium consistent with the barrel over the diesel reference value, investors said.
“Chinese refineries are taking on the merits of arbitration to import light-cycle oil to combine it with diesel and sell it in the domestic market with increased margins,” said Serena Huang, senior analyst at market research firm Vortexa Ltd. South Korean refineries, which increase their margins by promoting light-cycle oil to Chinese refineries that export diesel to the regional market. »
August expeditions
LCO exports from South Korea to China are estimated at 547,000 tonnes so far this month, according to Kpler, a.e. about 390,000 tonnes in the first six months of the year. PetroChina and Sinochem were among the main buyers of The July shipments, the knowledge intelligence company said.
Chinese purchases of LCO are expected to remain the main ones this month, as independent refineries use their government-issued crude oil import quotas, expanding their appetite for diesel blending, said Yang Xia, an analyst at trade rep SCI99.
China’s peak diesel consumption season is September and October, which LCO purchases deserve, however, major fuel inventories will reduce long-term demand, according to Fang Fang, Oilchem analyst.
The uptick in global oil costs and China’s energy recovery cap may also make peak volumes more difficult to maintain in the coming months. With Brent now trading at around $45 consistent with the barrel, the LCO is not as exciting as the diesel produced.
The Chinese LCO calls for support through the immediate recovery of diesel demand, as well as the soil value mechanism that kept the value of local fuel artificially high, said Fenglei Shi, an IHS Markit analyst. “We don’t believe that recent high-value LCO shipments to China are sustainable,” as those benefits are eroded, he said.
(Adds the analyst’s comment to the ninth paragraph).
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