China Crude Oil Imports Could Trigger Tanker Market Upside During Fourth Quarter

China’s fourth quarter crude oil imports remain a conundrum. In theory, China’s refineries have ample import quota to utilize, should they need to increase imports. However, this development is far from certain at this point in time.

In its latest weekly report, shipbroker Gibson said that “throughout the pandemic China has been a key focal point. Whilst it was the first country to go into full lockdown, and the first to see a significant collapse in oil demand, it has also been the country that so far, appears to have rebounded strongest. The country was also successful in exploiting the collapse in oil prices to snap up cheap crude, both for strategic and commercial inventories. Domestic refineries increased runs to capitalise on recovering internal demand and potential higher export demand as neighbouring countries emerged from lockdowns. However, overseas demand has remained stubbornly low, whilst renewed lockdown measures threaten any further consumption growth. The question heading into the end of the year is what will Chinese refiners do with their product surplus? Do they push it to export markets regardless, sell domestically or hold stocks?”

According to Gibson, “China’s quota system for crude imports and exports is a key factor which complicates matters for domestic refiners. Historically the system has operated on a ‘use it or lose it’ basis, with refiners fearful that if they do not fully utilise their quotas, they will receive lower allocations the following year. Customs data showed that between January and August, Chinese refiners had used 56% of their reported 56 million tonne export quota, meaning that they would have to export a total of 24 million tonnes between September and December before their quotas expire. However, so far looking at cargo tracking data, China exported just 3.36 million tonnes in September, suggesting that an average of 6.88 million tonnes/month needs to be exported to maximise quotas before the year end. Data from Kpler shows that the highest monthly total exported so far stands at 4.91mt. It therefore looks like an extremely tall order for Chinese refiners to fully utilise their export quotas by year end. However, there may still be a late rush to export refined products before year end, which could help lift the regional product tanker market”.

The shipbroker noted that “it could of course be possible for the Government to make special dispensations this year, perhaps allowing for quotas to be rolled over. Afterall, 2020 has been an unprecedented year. And even if refiners want to export, their markets are limited. Heavy refinery maintenance and regional run cuts are helping, but the arbitrage out of Asia does not look wide enough to support significant flows. The one factor exporters have in their favour is cheap freight. With both the crude and products markets weak, rates are expected to remain under pressure and are unlikely to provide a barrier to export volumes. Floating storage may also be an option. Exporters may seek to push product into floating storage in order to clear customs, however even this option may be challenging”.

“It therefore remains uncertain whether China will see an export boost before the year is out. Seasonally exports typically surge in the 4th quarter and the country has plenty of unused quota volumes to increase exports. However, overseas demand remains the biggest impediment to flows. As with most things oil these days, all eyes are on China”, Gibson concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide