The exports are expected to continue until year-end, likely weighing on low-sulphur cash differentials, the sources said, which have already dropped by half from a post-hurricane spike above $2 on US import demand.
While India overall is a net exporter of diesel, shipments are usually done by private refiners such as Reliance Industries and Essar Oil, with state-owned refiners not typically exporting the fuel, traders said.
Now, however, state refiners have returned units from maintenance and after upgrades to meet stricter sulphur content standards, and their product supply has increased, said Sri Paravaikkarasu, head of East of Suez oil at FGE.
The added diesel capacity is hitting as India's demand growth for the fuel slumps to half what it was in 2016, pulled down in the first quarter by New Delhi's demonetization policy, according to Joe Willis, a senior analyst at Wood Mackenzie.
"In addition, heavy floods and a surge in retail diesel prices, following daily price revisions, weighed on 2017 demand," Willis said.
Demand growth has also been hit by a recently implemented goods and services tax (GST) that has curbed production and fuel demand, a refining source said, declining to be named as he was not authorised to speak with media.
Heavy floods in parts of India and monsoon rains, which reduce the need to use diesel-powered irrigation pumps, also cut into demand, a second refining source said.
That has led to state refiners Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd (BPCL) and Mangalore Refinery and Petrochemicals Ltd (MRPL) offering or already selling 260,000 tonnes of low-sulphur diesel for November so far, according to tender documents seen by Reuters.
The three state companies also sold 205,000 tonnes of diesel with a sulphur content of 50 parts-per-million (ppm) for October loadings and 65,000 tonnes for September. They were largely absent from the spot market before that and were importers of the fuel earlier this year.
As demand slowed and product inventories built up, IOC also sold diesel through a six-month term contract, while BPCL's majority-owned Numaligarh refinery signed a long-term contract to supply diesel to Bangladesh.
India's refinery expansions are expected to add another 165,000 barrels per day (bpd) of crude capacity in the second half of this year, according to Woodmac's Willis.
And while diesel demand growth is expected to drop to 40,000 bpd this year, it is expected to rebound to 60,000 bpd next year, boosted by construction projects that will lift use of the fuel, and support from election campaigning near the end of 2018 for general elections due in 2019, Woodmac's Willis said.
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