Asia’s Regrade Flips to Premium on Expectations of Lower Fuel Exports from China
The regrade value, which represents the spread between jet fuel and diesel prices in Singapore, flipped from discounts in favor of gasoil to premiums in favor of jet fuel on Thursday’s closing, extending into Friday morning. This followed news that China may not be able to export as much gasoline, jet fuel and diesel as initially expected, according to various market sources.
The regrade value for November stood at $0.66/bbl at the Thursday close and opened Friday at around a premium of $2.00/bbl, according to sources.
The regrade value had been largely in the discounted range since the second half of June as the Asia gasoil market was supported by increasingly bullish sentiments in the west, as Russia restricted diesel exports starting July. More recently, the U.S. has mulled over similar restrictions more, while Europe approaches its peak diesel demand season.
Jet fuel sentiments in Asia became more bearish at the start of this week when rumors circulated that China has released the October export quotas for refined oil products and that its state-owned refiners could export over 2 million metric tons of jet fuel in October.
The script flipped by mid-week, when new data emerged that China’s domestic inventories of the various fuels were extremely low, leading some players to predict that China may re-impose restrictions on exports and prioritize the domestic market instead.
Market confusion was further exacerbated by China’s Golden Week holiday on Oct. 1-7, sidelining most Chinese players.
The latest feedback from market sources stated that while the China government did not impose any new restrictions on exports of refined oil products, it has not and it may not issue any export quotas for October. This will naturally prevent Chinese refiners from exporting these products overseas, except for exports to Hong Kong, China, and Macau, China.
Exports loading in the first half of October from China will likely go ahead as scheduled as Chinese refiners sold these cargoes using their September quotas, while most should be able to ship out term cargoes in October as they had previously set aside some quotas for them, sources said.
Without additional quotas from the government, Chinese refiners will not be able to offer any spot volumes for loading in the second half of October.
As a result, the Asia jet fuel market’s sentiments flipped from bearish — due to expectations of ample availability of jet fuel exports from China — to bullish, due to expectations of limited jet fuel exports from China in October.
The sharp gain in jet fuel prices in Asia also meant that the price spreads with Europe and the U.S. West Coast are now much smaller.
The front-month East-West price spread to Europe had been in discounts larger than $100/mt since mid-September, but rebounded to a discount of around $95/mt on Thursday closing, according to sources.
In addition, players are now looking at the November spread instead of October, which is even smaller due to the backwardated structure.
The calculated arbitrage window for Northeast Asia jet fuel exports to the U.S. West Coast was initially wide open on Wednesday but slammed shut on Thursday after Asian prices surged.
The calculated Netback Factor compared Northeast Asian export prices coupled with freight costs against landed prices in the USWC, with a positive value stating that the latter prices are likely lower than the former prices and vice versus.
The Netback Factor was at a discount of $21.66/bbl on Wednesday, lowest since mid-May but rebounded to a premium of $5.38/bbl on Thursday, highest in almost two weeks, according to OPIS data.
—Reporting by Kite Chong, kite.chong@dowjones.con; Editing by Mei-Hwen Wong, mei-hwen.wong@dowjones.com