The Chinese diesel situation

Well it appears that we are about back up to $90 a barrel oil which is the top end of the range which the Saudi Oil Minister said he was comfortable with, the other day. However, I suspect that were it to go higher, it would not change the current Saudi plans on oil production.

It might, however, draw more attention to the problems of dealing with an increasing demand for oil, in face of a limited ability to meet that demand. OPEC have just announced that they see next year’s average demand to be at 87 mbd, up about 120,000 bd over their estimate last month. Whether that projection proves realistic will depend on what happens in Asia.

Refineries in Asia have been faced with an increased demand from China, where there have been recent shortages of diesel across country, likely leading to the price increases that have just been imposed. Part of the cause of the increase is because refineries in China were reported to be losing up to $18 a barrel in refining oil they were buying at $80 a barrel. (Diesel was at $2.43 a gallon, and prices have been raised 10%, which given the current oil price, still leaves the refineries making a loss). Nevertheless Chinese government data shows that refining reached a record volume (8.8 mbd) in October, at the same time that overall Chinese crude imports fell for the month. In light of the increased demand it is expected that this month’s production will be even higher. Sinopec will also import feedstock for ethylene production so that refineries that were being used to supply the feed can, instead, concentrate on making diesel.

The unexpected size of the problem has been caused by the Chinese government trying to lower electricity consumption to meet a national target for energy savings by the end of the year. As a result of those decisions coal-fired power fell back, in October to the levels of a year ago, after an earlier increase. Because of these cuts in power, those who still need it (including metal production plants) have switched to diesel generators, with the increase in demand overwhelming the available supply. (Though some have had to close including 100,000 tons of aluminum smelting capacity). Thus the situation may be transient and improve, with electricity supply, after the end of the year, though that is not necessarily a given at this point, since it is dependant on government policies. (And hidden in that discussion has been the Chinese record refinery outputs of gasoline, which also hit a new record this month.)

For countries in Asia outside China the situation is reversed. With the profit on refining Dubai crude at over $14 a barrel in Singapore, refineries around the region are seeking to increase imports of crude. (China has been a net exporter of diesel until recently, but demand had grown, until recently, at 13% this year leading China to the potential switch to becoming a net importer of diesel, though that is debatable.) There are thus some strains evident in current ability to match existing demand.

In addition to getting additional supplies of crude from Russia, China has also increased crude imports from Iran, helping that country at a time when gasoline rationing and sanctions are being blamed for an 18% drop in internal gasoline demand.

In the United States there has been an increase in distillate demand according to the latest TWIP that is somewhat greater than usual:

(EIA)

The heating season is however anticipated to be, in general warmer than usual (sorry NorthEast), reducing heating fuel needs.

Fuel expenditures for individual households are highly dependent on local weather conditions, market size, the size and energy efficiency of individual homes and their heating equipment, and thermostat settings. The National Oceanic and Atmospheric Administration (NOAA) projects population-weighted U.S. heating degree-days will be about 4 percent lower than last winter. However, heating degree-day projections vary widely between regions. For example, NOAA projects that the South, a large market for propane, will be about 17 percent warmer than last winter, while the Northeast will be about 4 percent colder. The largest residential propane consuming region is the Midwest, where 8 percent of the homes heat with this fuel. Projected temperatures in this area are 2.2 percent warmer than last year. EIA projects Midwest propane prices to increase by 18 percent this winter while consumption in that region falls by 2.3 percent, resulting in an expenditure increase of 15 percent.

Oh, and in case you missed it, following my piece on explosives on Sunday, just to prove that not everything in life goes perfectly, here is a chimney demolition falling the wrong way.