OREANDA-NEWS. July 05, 2011. Asia's gas oil market strengthened, as cracks rebounded from a five-month low on prospects of China importing more diesel to meet rising demand for power generation during the peak summer months.

The market has been weighing the impact of China's move last Friday to cut import duties on diesel and jet fuel to zero in an effort to encourage refiners to import the fuel to help meet a power shortage expected in some parts of the country next month. 

This comes even as more supply is expected to hit the market as South Korea and Japan release more oil products into the market as part of an IEA-led program. 

Still, Japan's move to release 7.9 million barrels of mostly oil products by relaxing a mandatory inventory requirement was unlikely to have a significant impact, analysts said.

"In March, Japan relaxed its 70 day inventory requirement to 45 days following the Tohoku earthquake, but on May 21 it reinstated the higher requirement as refinery output and inventory builds were running well ahead of weak demand," said U.S. investment bank J.P. Morgan in a report. 

"Apparently, the action had little impact on overall stocks. Similarly this reduction, coming only five weeks later, should have minimal impact," the report said.

Tighter supplies in coming months due to a continued curb on Chinese diesel exports and refinery maintenance in the country is also boosting sentiment, traders said.  "We expect the recent decline of gas oil cracks to be short-lived, particularly as it comes in the face of vibrant wider regional demand and refinery maintenance," said analysts at JBC Energy in a report on Wednesday.  The market is also supported by expectations of firm Indian demand, which is expected to strengthen despite a hike in diesel prices implemented last week.  "Demand for diesel is pretty inelastic, so the higher prices won't have a huge impact on demand," said a Singapore-based distillates trader. 

Analysts said India has been structurally short on diesel since 2010, a trend that is likely to continue. "This means India would need to rely on imported diesel to close the domestic shortfall. Depending on the scale of India's import need, this could be supportive for the oil balance," said Deutsche Bank analyst Soozhana Choi. 

Activity was subdued in the physical spot market, with no trades done in the jet fuel market and two 10-ppm sulphur grade gas oil deals done during the pricing window. The cash differentials for all benchmark middle distillates grades were steady to the previous session.  Kuwait Petroleum Corp. is offering 40,000 tonnes of jet fuel for July 22-23 loading via a tender, traders said.   Volumes were thin in the swaps market, with around 200,000 barrels of the July swap traded and 100,000 barrels of the July/August timespread by 0830 GMT.