Why are the prices of diesel produced locally in Shandong soaring?

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From January to April, China’s diesel production declined by 1.3% on a year-on-year basis. With imports remaining roughly the same as last year, exports increased significantly to 4.0147 million tons, a surge of 328.28% on a year-on-year basis. This means that the actual domestic supply of diesel during this period was only 54.342 million tons, representing a decrease of 6.72% compared to the previous year. Furthermore, it should be taken into account that **there is a certain delay in the release of data by the statistics bureau. Theoretically, if we use the operating rates of the \"big three oil companies\" as a reference, their average operating rate in May 2016 was 76.76%, a decrease of 3.05% compared to the same period the previous year. By extension, it is almost certain that China’s diesel supply will have decreased on a year-on-year basis for the period from January to May. While it is widely believed that China’s diesel demand may decline in the next two years, the drop in China’s diesel production also supports this view. However, taking the local refineries in Shandong as an example, due to a significant increase in the operating capacity of the atmospheric and vacuum distillation units, diesel production by these local refineries increased by over 3 million tons from January to April compared to the previous year. Yet, the inventory levels of diesel produced by these local refineries remained extremely low. This reflects the fact that while the ‘Big Three’ oil companies reduced their diesel production, the diesel output of Shandong’s local refineries increased owing to the higher operating capacity of those distillation units. This unintended increase ended up taking market share away from the ‘Big Three’ oil companies ； On the other hand, this also indicates that domestic diesel demand does not seem to be as weak as expected by outsiders. Of course, these two factors are also key reasons behind the sharp rise in the prices of diesel produced locally in Shandong. Pressure from raw material costs is gradually emerging; the price of domestically produced diesel has a solid foundation for support. Since early April, international oil prices have been fluctuating upward overall. After the buffer effect provided by the prior utilization of low-cost crude oil stocks, the pressure on the raw material costs for domestic refineries has now begun to show up. According to a person from an oil refinery, there is basically no profit to be made from processing imported crude oil at present. In 2015, the ratio of diesel to gasoline (in terms of production) for local refineries in Shandong was 1.67; from January to April 2016, this ratio dropped to 1.63. However, despite local refineries in Shandong making significant efforts to adjust their product mix and increase gasoline production, the output of diesel from these refineries remains quite high compared to domestic demand (the ratio of diesel to gasoline in 2015 was 1.50). This means that, at present, compared to gasoline, diesel still plays a crucial role in the overall refining profits of refineries. Taking the cost of raw materials into account, a significant reduction in diesel prices would inevitably have a direct impact on the profits of local refineries. For reasons related to their operational strategies, it is crucial for these refineries to maintain stable diesel prices; this constitutes another important factor contributing to the sharp rise in the prices of diesel produced by local refineries in Shandong.