Houston (Platts)--14Dec2012/1123 am EST/1623 GMT

A change in Chinese fuel oil import and production trends is unlikely to affect the US despite the high amount of US fuel oil now imported to Asia, market sources say.

China National Chemical Corp. (ChemChina), the state-owned teapot refineries' operator, is expected to receive an import quota of 10 million mt/year of crude oil to run in its seven refineries in place of fuel oil, traders told Platts in November.

Analysts have suggested this could cause other teapot refinery owners to switch to crude imports, displacing fuel oil imports now used to run the plants. In addition, the refineries would not be producing fuel oil.

Such a move, if it became widespread, could both reduce the amount of fuel oil imported into China and increase the amount China produces locally.

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However, even if multiple teapot refineries in China move from running fuel oil to heavy crudes, concurrent changes in the US market are likely to keep such a change from having a major effect in the US.

"We are already seeing the effects of the US refining a higher percentage of lighter/sweeter crude.... I am not sure that [a change in China feedstock source] will affect global demand as much as it will shift supply balances," an Atlantic Coast fuel oil trader said. "Does China producing a heavier resid offset the reduced rate of heavier crude being refined in the US?"

ChemChina by itself, which has a processing capacity of 25 million mt/year among its seven refineries, will not be enough to radically alter the fuel oil market in China either, another Atlantic Coast trader said.

"If it was one of the big boys, maybe, but ChemChina is a small player," he said. He noted that ChemChina can't by itself import crude oil as only three petroleum companies have a license to do so -- PetroChina, CNOOC and Sinopec -- and it would have to work out a deal to buy imported crude from one of those three, something other teapot refineries aren't showing a desire to do.

BURNING RUSSIAN STRAIGHT RUN

"The teapots are consuming a lot of fuel oil at the moment, [and] demand is healthy," he said.

Much of what they are burning is likely Russian straight run, not fuel oil exported from US, which typically ends up in the bunker fuel pool, according to a third fuel oil trader.

Not everyone in the market agrees with those sentiments, particularly in the Gulf Coast where the bulk of exports have been high sulfur fuel oil sent to Asia.

A switch to sour crude by refineries could potentially have an effect on the Gulf Coast fuel oil market by creating an excess of supplies since Chinese refineries could produce more fuel oil, which in turn, could result in less fuel oil exports out of the Gulf Coast, a Gulf Coast trader said.

China is the second largest Asian import market of US fuel oil after Singapore. The US exported a total of 542,000 barrels of residual fuel oil to China this year through September, according to the most recent data from the Energy Information Administration.

The majority of the exports were in August and September, with 285,000 barrels and 253,000 barrels, respectively. In 2011, only 295,000 barrels of residual fuel was exported to China, with the majority -- 289,000 barrels -- exported in October.

This year, through September, the US had exported 25.6 million barrels of residual fuel oil to Singapore, according to EIA's most recent data. The US exported a total 41.3 million barrels in 2011, although that data does not distinguish between high-sulfur and low-sulfur residual fuel. Fuel oil exported to Asia is generally high-sulfur.

Fuel oil exported to Singapore is generally absorbed into the Singaporean bunker market or distributed to the rest of Asia.

--Joshua Starnes, joshua_starnes@platts.com
--Meera Patel, meera_patel@platts.com
--Lucretia Cardenas, lucretia_cardenas@platts.com
--Edited by Robert DiNardo, robert_dinardo@platts.com

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