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China hits brakes on crude imports after buying frenzy

China will press the brakes on crude imports in the third quarter, after record purchases in recent months, as higher oil prices hurt demand and refiners worry about a second virus outbreak, analysts and trade sources said.

China imported a record 11.3 million barrels per day (bpd) of crude in May, with volumes set to rise in June and July, as cheap crude purchased during an oil price slump in April arrives in the country.

But the world’s top crude importer is expected to receive around 0.8-1.3 million bpd less crude from abroad in August and September than it did in May, analysts forecast.

With Brent prices back above $40 a barrel and a new wave of coronavirus cases raising fears a nascent recovery could be derailed, traders say independent refineries – which account for a fifth of China’s crude imports – are already reducing the amount of crude oil they are buying.

“With a more slow-paced demand recovery path ahead, we expect some run (rate) cuts in coming months, which could first start with some independent (refineries),” said Chen Jiyao, an oil market consultant at FGE.

Chinese oil imports soared as Brent crude prices fell to their lowest since 1999, dipping below $20 a barrel. Refiners cashed in, snapping up cheap crude and selling diesel and gasoline at higher retail prices secured by the government.

Shipping data from Refinitiv Eikon showed over 50 tankers queued around the oil refining hub of Shandong province on June 18 – double the 22 vessels recorded a month earlier.

But energy consultancies FGE, SIA Energy and Rystad Energy all expect imports to ease off in the third quarter from the second quarter, even as the country has added new refining capacity, underpinning crude demand.

China’s crude imports should return to more normal levels of 4.2% growth year-on-year in the third quarter, down from 7.4% growth in the second quarter, said SIA Energy’s senior director Seng Yick Tee.

Yuntao Liu, China analyst at Energy Aspects, estimated crude arrivals of 10.5 million bpd in August and less than 10 million bpd in September, slipping from imports of more than 11.5 million bpd in July.

SECOND WAVE

China’s buying spree has helped the overall oil market by absorbing some of the excess supply built up in recent months when lockdown restrictions in other countries hit their refineries’ appetite for crude.

Indeed, state-backed and independent refineries raised their operating rate to 80% and 74% respectively in late May from around 67% and 38% in the first quarter, according to China-based consultancy Longzhong Information Group.

China’s crude inventory, however, is expected to hit a historical high of 1.1 billion barrels at the end of June, said SIA Energy. That, along with the slowdown in Chinese oil imports, will likely put downward pressure on global oil prices in a market already hard hit this year.

“We would like to crank up output to make up the loss made during the coronavirus pandemic, but headquarters instructed us not to … partly because they are concerned about product inventory pressure,” an official at a refinery owned by Asia’s largest refiner Sinopec told Reuters on condition of anonymity because he was not authorised to talk to the media.

Global lockdown measures curbed demand for oil earlier this year, and appetite could take another hit if countries face a second wave.

A rise in coronavirus infection cases in Beijing has forced authorities to cancel scores of flights, shut schools and block off some neighbourhoods just as the world’s second largest economy had started to reopen.

A second contagion wave in China could reduce oil product demand in the country by about 1 million bpd in the third quarter, said Rystad Energy’s senior oil market analyst Paola Rodriguez Masiu.
Source: Reuters (Reporting by Muyu Xu in Beijing, Shu Zhang and Chen Aizhu in Singapore Editing by Florence Tan and Ana Nicolaci da Costa)

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