A low 2020 base, worldwide economic recovery as well as OPEC’s supply discipline pushed up the Brent oil price above USD70/barrel in 2Q21. Domestic production growth was sustained in 1H21; gas production rose by 11.1% yoy, whereas oil production was up by 2.2% yoy, as national oil companies accelerated exploration and production.
Fitch expects NOCs’ production growth to stay steady on higher upstream capex and for segment profitability to improve with increased volumes and oil prices. Strong Production, Soft Refining Margin: NOCs reported solid refining and marketing margins in 1Q21 on the demand recovery and lower inventory costs. We expect margins to decline in 2H20, as the oil price hike starts to take effect. Nationwide refining production approached pre-pandemic levels in 1H21.
Private refineries – known as teapots – in China’s Shandong province ran at peak utilisation, thanks to low-cost oil stocked in 2020. We expect teapots’ utilisation to fall in 2H21, given the oil price rally and tightened crude oil import quota. However, we expect refining oversupply to persist.
In addition to the large new capacities to commission, the utilisation of state-owned refineries’ existing capacity also started to rise during 1H21 as major overhauls were completed. Gasoline and diesel exports rebounded by 21% and 15%, respectively, in 1H21, supported by a higher export quota and a recovery in regional crack spread. The gasoline crack spread showed a steeper rebound on the opening up of the economy as the pandemic situation eased. We believe exports may trend down, as the second batch of quota was 73% lower yoy. China intends to curb domestic refining activity, as it is polluting and uneconomic to export.
Source: Fitch Ratings