Measures by the Chinese government to open the mid-stream and retail petroleum markets will boost domestic gasoline and diesel sales with an immediate impact already seen on blendstocks as aromatic products are diverted to the blending pool, market sources said.

The announcement late on Aug. 27 by the General Office of the State Council was aimed at accelerating the development of the distribution chain, encouraging commercial consumption and expanding market access for refined oil products.

It would reduce the paperwork needed for wholesale and warehousing operations, delegate approval to prefecture and municipal levels from the central government as well as give local groups the ability to build petrol stations and charging points on their collective land to boost oil product consumption.

"The government has removed the high cost of entry, including the requirement for companies to own storage, refining or transportation assets before they are allowed to enter the wholesale market," said Sophie Fengli Shi, principal analyst at IHS Markit in Beijing.

"These moves are expected to increase the number of players in the mid-stream sector," Shi said. "It will open the doors for oil traders, International Oil Companies (IOC) and other domestic players to participate in this business."

The opening up of the sector would lead to greater competition, which the government hopes will reduce prices and boost consumption, market sources said.

Early this year, China awarded a license to Shell that allows it to independently trade oil products in the domestic wholesale oil market, which some sources said was the first given to an IOC and a precursor to Beijing's intention of opening the sector to more players.

There are about 100,000 gas stations in China, which is dominated by Sinopec and PetroChina as well as other large Chinese oil companies such as CNOOC and SinoChem. The rest of the sector is divided up among independent companies and joint ventures between Chinese and foreign companies.

A small portion of the petrol kiosks are owned by foreign companies, such as Shell, BP, Chevron, ExxonMobil and Total, mainly through joint ventures.

The latest government initiative will encourage these players to expand faster than planned with companies such as BP and Shell already having aims of building thousands of stations.

According to IHS Markit analysis done prior to this announcement in its July outlook released a month ago, China's gasoline demand growth was forecast to slow down to 134,000 barrels a day (b/d) in 2019 and 123,000 b/d in 2020.

Gasoil demand, on the other hand, is expected to gain by 23,000 b/d in 2019 and 77,000 b/d in 2020 as the International Maritime Organization's (IMO) 2020 mandate to use low sulfur fuels is likely to help offset the impact of economic headwinds on the diesel market, IHS Markit said in the report.

"It's still too early to judge but in the long run, this will certainly benefit private refineries such as Hengli, Hongrun and Zhejiang PC who can build their own gas stations and sell in the retail market," said a source from China National Offshore Oil Corp. (CNOOC).

"Prior to this announcement, the Zhejiang government has already relaxed its rules for Zhejiang PC but we have yet  to see the company take advantage of it," he added.

Hengli Petrochemical Co. Ltd. is now running its new 400,000 b/d Hengli refinery in Dalian at full tilt, while Hongrun started commercial production at its 100,000 b/d refinery in Shangdong province early this year. Zhejiang Petrochemical has started up one of its two 200,000 b/d CDU, which is on trial runs at the moment.

Demand for gasoline blendstocks such as toluene and mixed xylenes (MX) will be boosted following this announcement, market sources said.

Prompt MX cargoes were heard traded at RMB6,150/mt ($740/mt on import parity basis) on Thursday, up RMB400 since Monday. This is also $40 higher than the FOB Korea price.

The higher Chinese price is due to a combination of factors, including strong chemical demand, low inventory and optimism from gasoline blenders following the relaxed sales rules, the source from CNOOC said.

--Raj Rajendran, (Rajendran.Ramasamy@ihsmarkit.com)

--Sok Peng Chua, SokPeng.Chua@ihsmarkit.com

 

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