Little-Known Oil Product Snapped Up for Ship Fuel in China

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  • China embraces the use of a lesser known LCO to tackle the struggles with low profits, to be blended with diesel or fuel oil
  • Higher demand for diesel from shipping and need for less dirtier fuel made LCO popular and imports exceed in April and May.
  • Diesel demand is supported from agriculture and unreported bunkering use in China.
  • China’s apparent diesel demand point to a more than 9% decline in April-May versus the previous year and Gasoil is currently trading near a four-month high.

Chinese refiners struggle with low profits from turning oil into products like gasoline and plastics. So the country bags up on LCO to be used as ship fuel, reports Bloomberg News. 

Light-Cycle Oil (LCO) 

Imports of light-cycle oil, a by-product of crude that exceeded in the months of April and May. This lesser known product can be blended with diesel or fuel oil. 

The popularity of light cycle oil is being driven by higher demand for diesel from shipping, following the introduction of rules prohibiting the use of dirtier fuels. 

Refiners are mixing more LCO into diesel rather than buying costlier crude to make diesel. Diesel use also typically rises in the second quarter due to the planting of rice and wheat.

IMO 2020

China has required vessels use fuel with less than 0.5% sulfur since the beginning of this year, before the International Maritime Organization imposes the limit from next January in a shift that’s known as IMO 2020. 

Low Sulfur fuel

IMO 2020 is aiding LCO as it lifts demand for low-sulfur fuel such as diesel, a grade that could be hit by a slowdown in industrial use if the U.S.-China trade war worsens.

Agriculture and unreported bunkering use

Michal Meidan, an analyst at consultant Energy Aspects Ltd. in London, said that there is enough evidence that diesel demand is supported from agriculture and unreported bunkering use in China. 

She added that Chinese domestic diesel prices remained high in April, suggesting not-too-bearish demand for the fuel. 

Calculations of China’s diesel demand 

Bloomberg calculations of China’s apparent diesel demand point to a more than 9% decline in April-May versus the previous year. 

But it might not represent a full picture of the nation’s supply and consumption patterns due to a lack of clarity on blending activities. Total industrial output and imports are included for the calculations. 

Imports of light cycle oil rose 73% in April from a month earlier and another 15% in May, reaching the highest level since December 2018 in China. The purchases increased 9% and 18%, respectively, on a year-on-year basis. 

Gasoil, an alternative name for diesel, is currently trading near a four-month high, according to Bloomberg Fair Value Price.

IMO 2020 in inland rivers to aid shipping demand 

Amy Sun, an analyst at Guangzhou-based commodities researcher GL Information, said that China’s demand for diesel has found support from a recovery in industrial activities after the Chinese government cut taxes for corporate companies. 

She added that the nation’s early adoption of its own version of IMO 2020 in inland rivers is aiding demand from shipping. 

Asia’s largest economy

LCO imports have more than tripled since 2015 due to rising energy demand in Asia’s largest economy. The popularity of the blendstock was temporarily hurt by a high-profile smuggling case and the closing of a taxation loophole.

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Source: Bloomberg

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