Asia's middle distillates market strengthened on June 27, 2011, rebounding from last week's sharp falls, after China removed import duties on the two refined products to encourage more purchases from overseas.
Gas oil's front-month crack spread was valued above $17 a barrel by 0830 GMT, its first gain in 11 sessions, while jet fuel's crack rose above $18. The July spread between the two products, or regrade, was steady at $1.05 a barrel.
Diesel's premium to Dubai crude has fallen by over $4 in the two weeks to June 24 as expectations of imports by China to meet domestic demand dimmed.
But a move by China on Friday to cut import duties on jet fuel and diesel to zero revived hopes that refiners could be enticed to buy from abroad, traders and analysts said.
"China will cut its import duty for diesel completely from July 1, potentially turning the country into a net importer of the middle distillate this summer, as part of an effort to minimise power shortages during the peak demand season," analysts at JBC Energy said in a report on June 27, 2011.
Diesel generators are traditionally used by factories to plug power shortages.
Despite the cut in duties, a trader said that refiners would still suffer losses if they import at current price levels.
"It will help to ease their losses if they do import, but the economics for imports are still not workable. There is not enough financial incentive for them to import," said a Singapore-based trader.
The government will have to pay cash subsidies or diesel prices need to fall significantly before refiners might be tempted to import, he added.
"With Brent at around $100-$105, the refiners are near break-even, but it will need to fall further before imports make sense," said another trader.
However, gains in cracks would be capped by expectations of higher supplies in the region after South Korea and Japan said on Friday it would release over 11 million barrels of oil and oil products as part of a global emergency release led by the International Energy Agency.
Trading volumes in gas oil fixed-price contracts picked up at the start of the week, with at least 400,000 barrels gas oil's July swap transacted at $117.70-$118.10, versus 250,000 barrels on June 24, 2011. No trades were seen in the timespreads by 0830 GMT.
Gas oil's cash differentials strengthened in the spot market on the back of two deals down at narrower discounts.
The market is also watching the impact of India's decision to raise domestic diesel prices on its import demand. Diesel accounts for 40 percent of petroleum product demand in India and is the most widely used transport fuel.
Source: Reuters
