Episode 138: PODCAST: How may China respond to looming global energy crisis?

ICIS Asia Special Reports

GUANGZHOU (ICIS)--ICIS analysts discuss how China may respond to what seems like a looming global energy crisis.
Topics discussed on the podcast, featuring ICIS analysts Yu Yunfeng and Chow Bee Lin, include:

• China’s recent responses to soaring global energy prices
• An analyst perspective on how China may respond further

Bee Lin:

Welcome to this podcast. I am Chow Bee Lin, an analyst in oil refining at I.C.I.S. I am here with Yu Yunfeng, who is also an analyst at I.C.I.S. Yunfeng and I track the refining sector in Asia, with a primary focus on China.
In this podcast, we are going to discuss how China may respond to what seems to be a looming global energy crisis.
So Yunfeng, as we have seen, prices of oil and gas have been increasing sharply across the globe due to tightening supplies. China has been bracing for what seems to be a looming global energy crisis, and the suspension of oil products exports seems to be among the possible measures that China might take.
Do you think China will decide to ban distillates exports?
Yunfeng:

Thank you, Bee Lin.
Imports accounts for more than 70% of Chinese total crude oil demand. That is why crude oil supplies and prices are key concerns for the Chinese government.
An economic stimulus policy announced on 31 May by the Chinese central government included plans for accelerating government oil reserves projects, and for newly completed oil reserves tanks to start injecting crude oil as soon as it is possible.
I think it will make sense for China to keep its oil products for the domestic market when prices and supply are not favourable to crude oil buyers.
But banning distillates exports would mean having domestic refiners to cut operating rates whenever distillates storages are full, and that in turn would disrupt domestic petrochemicals feedstock supply, a side effect which, I believe, China will try to avoid as far as possible.
As we know, petrochemicals play an important role across supply chains that have far reaching impact on the Chinese economy. Hence, I think a distillates export ban is unlikely to be imposed in the near term.
Bee Lin:
If banning distillates exports is not a near term measure, do you see it happening further out in the future?
Yunfeng:
If an distillates export ban is on the cards, 2025 seems a more plausible timeline as it will allow time for China to shut down inefficient refining facilities, expand oil storage capacities and divert more resources from distillates to petrochemicals production.
But as in the rest of the world, there are many moving parts in the Chinese energy space.
For example, state owned refiners had planned to suspend gasoline and gasoil exports in April, as ICIS reported earlier, but the plans were not implemented.
Instead of suspending exports, China issued 4.5 million tonnes of additional oil products export quotas in end-May, as domestic demand fell and inventory increased sharply when several cities, including Shanghai, went into lockdowns in line with China’s zero-COVID policy.
Bee Lin:
Yes, the current uncertainty in the global energy space makes it hard to expect what may happen next.
Yunfeng:
Yes, there are a few possible scenarios. One scenario we have envisaged is that if the COVID-19 outbreaks in China are kept in check, and domestic distillates demand in China rise back up, while global crude prices stay at the current high levels or increase further, Chinese state-owned refiners may have no choice but to suspend distillates exports.
Bee Lin

Thank you for sharing your views, Yunfeng. For those listening, please feel free to reach out to us with questions. We will be happy to provide more information on how we can help you understand the unfolding developments in the China refinery sector.