China’s robust demand for oil has helped soak up some of the surplus crude sloshing around the world recently.

But the country’s refiners are now flooding markets with products including diesel and petrol, in the latest example of how surging Chinese exports are shaking the commodities industry.

China’s total exports of refined fuels jumped 38 per cent year-on-year to 4.2 million tonnes, or roughly 1.02 million barrels a day, in June, according to the latest data by the customs administration. Its refined fuel exports are up 45 per cent overall so far this year.

Much of the surge is attributable to a leap in shipments of diesel. In May, China’s exports of the fuel mainly used in heavy industry had quadrupled on-year to 1.5 million tonnes; data for June is due later this month.

The sharp rise 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.

Sagging demand at home as China’s economy slows 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.

In turn, 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 $US4 a barrel since the first quarter across Asia.

Petrol hasn’t proved immune. Despite relatively strong demand as passenger vehicle sales continue to rise, China has been exporting more, with shipments doubling in May from last year to 780,000 tonnes.

“(Global petrol) demand was off the chart last year and margins were in the double digits.

“All the refiners were incentivised to produce (petrol),” said Michal Meidan, a China specialist at Energy Aspects, a London research firm.

“But demand for this year is not as stellar, so you have a surplus of gasoline everywhere,” she said.

Much of the increase in Chinese refined product exports is down 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 import crude from abroad for the first time, rather than having to buy more expensive crude from state-owned oil companies.

The 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.

Teapot refiners could also soon export more too: some are aiming to ship 50 per cent of their total output abroad within three years, up from about 10 per cent, says Nelson Wang, energy analyst at brokerage CLSA.

He said teapots already often sold 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.

Chinese refineries’ rising output could keep its gasoline exports high.

Extracted in full from The Australian.