As Chinese Refiners Flood The World, Gasoline Tankers Pile Up In New York City Harbor

Just over a month ago, when we pointed out that that the gasoline curve was about to shift from contango into backwardation, we said that the gasoline tanker armada off the coast of Singapore was about to start offloading as it would soon become uneconomical to hold product in offshore storage. This meant one thing: China was about to unleash a wave of accelerated gasoline exports across the entire world.

[Editor’s note: I presume that they are only accepting yuan or gold backed securities and not the dollar or the petro dollar]

from Zero Hedge

We pointed out the unprecedented surge in Chinese gasoline stocks…

… and added that as China continues to imports tremendous amounts of both crude and product, far greater than actual demand, this would send “China’s gasoline stocks to even higher record levels. In other words, the global glut is now not only at the crude and distillate level, but also in global gasoline stocks.”

One month later we find out that this was a correct assessment of the situation.

According to the WSJ, while initially China’s demand for oil helped soak up some of the surplus crude sloshing around the world, China is no longer the handy excess supply “buffer” it once was and as a result China’s teapot refiners are now flooding markets with products including diesel and gasoline, in the latest example of how surging Chinese exports are shaking the commodities industry.

China’s total exports of refined fuels jumped 38% on-year to 4.2 million tons, or roughly 1.02 million barrels a day, in June, according to the latest data released Wednesday by the customs administration. Its refined fuel exports are up 45% overall so far this year. Much of the surge is attributable to a leap in China’s shipments of diesel. In May, China’s exports of the fuel mainly used in heavy industry had quadrupled on-year to 1.5 million tons; detailed data for June is due later this month.

The sharp rise is merely a confirmation of what many have said all along: in its relentless bailouts of all enterprises, the Chinese government is unleashing a deflationary wave around the globe, which forces Chine to dump its products to any and every buying around the globe, in the process massively undercutting prices. This mirrors similar increases in China’s exports of processed basic materials like steel in recent months, a trend that has provoked anguished complaints from governments and industry bodies across the world.

Worse, what many thought was stable Chinese domestic demand, ended up being just the filling of every possible container, not to mention the now almost full SPR, in lieu of actual domestic commodity demand. As such, China’s sagging demand as the economy slows once more has left the country’s oil and metal refiners with huge surpluses they are increasingly looking to sell abroad.

“[China’s] demand for diesel continues to disappoint, mainly as a result of slower industrial output compared to [the] same period in 2015,” according to a recent report from the Organization of the Petroleum Exporting Countries.

Thus, unable to sell at home, China is aggressively exporting the latest deflation tidal wave, and the flood of Chinese diesel and other refined products spilling outward is bringing down prices in Asia, hitting China’s regional rivals hard. Refining margins—the difference between what refiners pay for crude versus the prices of the refined products they sell—have dropped by a third to around $4 a barrel since the first quarter across Asia, according to a report by J.P. Morgan.

Gasoline hasn’t proved immune.

Despite relatively strong demand within China as passenger vehicle sales continue to rise, China has been exporting more, with shipments doubling in May from last year to 780,000 tons.  “[Global gasoline] demand was off the chart last year and margins were in the double digits. All the refiners were incentivized to produce gasoline,” said Michal Meidan, a China specialist at Energy Aspects, a London-based energy research firm. “But demand for this year is not as stellar, so you have a surplus of gasoline everywhere,” she said.

That is most certainly true not only for China, but as we noted earlier in our post about oil’s “death spiral” in the US as well, where plunging crack spreads likewise confirm that the US also now finds itself with far too much product (albeit due to different dynamics). As we have explained previously, much of the increase in Chinese refined product exports is due to shifts in the way the industry is regulated at home. Beijing has more than doubled the amount it allows refiners to sell abroad this year, according to Energy Aspects data.  The resurgence of China’s independent crude refiners, known as teapots, has also been key.

Last year, Beijing allowed these teapots to directly import crude from abroad for the first time, rather than having to buy more expensive crude from domestic state-owned oil companies. Their subsequent ramp-up in production has provided big state-owned refiners such as Sinopec and China National Petroleum Corp. with greater competition at home, leading them to sell more abroad.

But the worst news is that this is just the beginning:

Teapot refiners could also soon export more too: Some are aiming to ship 50% of their total output abroad within three years, up from around 10% currently, says Nelson Wang, energy analyst at brokerage CLSA, based on recent conversations with a number of such operators.

But who will they sell too? After all the world is already flooded with gasoline? Well, for a low enough price, they will find buyers. Teapots already often sell refined products at a discount compared to their rivals at home and abroad to attract customers. “This is just the beginning, and the bigger threat [on margins] is yet to come,” Mr. Wang said.

But the worst possible case is if China’s economy were to hit another major snag. As the Chinese government seeks to steer the economy from an industry-heavy focus to a consumption-based one, domestic demand for refined fuels could wane further, in turn stoking more exports of diesel, analysts say. In turn, analysts say China’s crude imports could also decline: they hit a five-month low in June at 30.62 million tons, though that was still up 3.8% on-year.

Chinese refineries’ rising output could keep its gasoline exports high too. The country’s gasoline production could outpace domestic demand growth by 9% this year, according to analysts at energy researcher ICIS.


“Exports are still the main solution for China to mitigate the oversupply of gasoline,” said ICIS, forecasting China’s shipments this year to hit 8 million metric tons, or 160,000 barrels a day, a jump of 40%.

And while Chinese gasoline exports have not hit the US yet (and they well may eventually), the US is already having a major problem with storing all the gasoline the rest of the world has to export. None other than the IEA in its monthly report said that the global gasoline glut is so big that tankers are now storing in New YOrk’s harbor. “Brimming” inventories, concern over gasoline demand in key markets, “weighed down” prices for the fuel in June.  The IEA also adds that some companies “have been forced to turn to floating storage in the New York Harbour area.”

As Reuters reported last week, at least two tankers carrying gasoline-making components have dropped anchor off New York Harbor for nearly a week, unable to discharge their cargoes in the latest sign that storage for the fuel is running out, traders said. Several tankers with gasoline have also been diverted from the New York region to Florida and the U.S. Gulf Coast in recent days, a rare move that underscores oversupply in the pricing hub for the benchmark U.S. gasoline.

The 74,000 tonne tanker EMERALD SHINER , carrying a cargo of alkylite from the west coast of India has been anchored off the New York Coast since June 28, according to Reuters shipping data and traders.


The 37,000 tonne ENERGY PROGRESS , with a cargo of reformate from Turkey, has similarly been waiting outside New York since June 28.


Furthermore, at least three cargoes of gasoline from Europe, which heavily relies on exports to the U.S. East Coast, have been diverted in recent days from New York Harbor to Florida and the U.S. Gulf

Coast, ship tracking showed.


Those include the tankers ENERGY PATRIOT , SEASALVIA and ANCE.

“Tanks are full to the brim in New York Harbor,” a trader said.

There is much more on this topic, but at its core it is a very simple story of too much supply and not enough demand.

And now that the market is finally realizing what happened, the understanding that oil’s “death spiral – edition 2016″ is being catalyzed not just by oil market dynamics, but by oil products such as diesel and gasoline, isfinally being appreciated by the market…  just as we predicted would happen back in February.

Read More @ Zero

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