Hopes for a potential peace plan in Ukraine have sent shockwaves through the energy market this week, causing the gasoil crack spread to plummet to $25 per ton from $35 per ton in a matter of days.
A peace deal could lead to the easing of current sanctions imposed on Russia.
Should such a de-escalation occur, it is highly probable that the recently established and crucial trade flows of Russian crude oil and petroleum products to key purchasing nations—specifically China, India, and Turkey—would be able to return to their previously established, more regular patterns.
This normalisation would have broad implications for the global energy market, potentially stabilising prices and supply routes that were severely disrupted following the imposition of Western sanctions.
The production losses at Russian refineries, which led to Russia’s partial ban on diesel exports, are expected to cease if a deal is reached with Ukraine, according to Commerzbank AG analyst Barbara Lambrecht.
Low distillate stocks fuel market anxiety
Market nervousness was also particularly high because distillate stocks across the Atlantic are particularly low: the build-up of 1.1 million barrels compared to the previous week in the week ending November 21 did nothing to change this.
The figure was, in fact, below the seasonal norm, causing the deficit against the 5-year average to increase once more, reaching 7.2%, she explained.
However, the tight supply situation and market anxiety are not without potential solutions for relief, with attention increasingly turning to the possibility of supply flowing from non-traditional sources.
Significant hope for easing the global diesel crunch comes from the prospect of increased exports from China, according to Commerzbank.
As a major refining hub, China possesses the capacity to significantly impact global product markets.
China may offer relief
Should Beijing decide to adjust its export quotas or boost refinery utilisation specifically for product exports, it could make a substantial volume of diesel fuel available to the international market.
This potential injection of supply from a key global exporter could serve to counterbalance current deficits, helping to stabilise prices and reduce the pressure currently being felt across major consuming regions in Europe, Asia, and the Americas.
Chinese refineries are poised to significantly boost their export volumes in December, a strategic move aimed at capitalising on the substantial profit margins witnessed in the preceding period, according to projections and estimates from Reuters.
This expected surge in exports is underpinned by China’s robust domestic production capacity, which currently operates with considerable headroom.
Official data and industry analyses indicate that a large segment of this refining capacity is not being utilized to its full potential, with operational rates often falling below 80%.
The ability to ramp up exports quickly stems from this existing slack in the system.
When market conditions present favorable arbitrage opportunities, such as high international product prices relative to domestic crude costs or processing fees, Chinese refiners can swiftly increase throughput and divert excess production to overseas markets.
The anticipation of increased shipments in December highlights the proactive approach of Chinese state-owned and private refiners in managing inventory and optimising profitability in response to global demand and pricing signals.
“In addition, the state-regulated export quotas for this year have not yet been used up,” Lambrecht said.
As we pointed out a week ago, China’s diesel exports this year are well below the levels reached around three years ago.
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