Despite weak crude oil imports, China keeps building stockpiles
One of the features of the crude oil market this year has been China’s weak imports and faltering exports of refined fuels.
But despite the decline in oil imports, China has actually been building up inventories, as crude imports and domestic production has been exceeding the volume of refinery processing.
China added about 850,000 barrels per day (bpd) to either commercial or strategic stockpiles in August, according to calculations based on official data.
This was an acceleration from the 290,000 bpd inventory build in July, and brought the total additions to storages for the first eight months to about 1.46 million bpd.
China doesn’t disclose the volumes of crude flowing into or out of strategic and commercial stockpiles. But an estimate can be made by deducting the amount of crude processed from the total of crude available from imports and domestic output.
Crude imports were 9.5 million bpd in August, based on official data, up 8.1% from July’s 8.79 million bpd in July, but they were still down 9.4% from August 2021.
Domestic oil output was 3.99 million bpd in August, down a touch from July’s 4.03 million bpd.
Putting imports together with domestic production gives a total of 13.49 million bpd available to refineries.
Refinery throughput was 12.64 million bpd in August, up slightly from July’s 12.53 million bpd, which was the lowest daily rate since March 2020.
Subtracting the refinery runs from the total crude available leaves a gap of 850,000 bpd, which is the approximate volume that would have been added to inventories.
For the first eight months of the year, crude available from imports and domestic output was 14.51 million bpd, while refinery processing was 13.06 million bpd, meaning about 1.46 million bpd was added to stockpiles.
What the numbers show is that even if China decides to increase refinery processing rates to meet improving domestic fuel demand, or to serve any increase in fuel export quotas, it can do so without necessarily buying more crude.
At least three state-run refiners and a major independent processor are considering increasing throughput by about 10% in October, in anticipation of stronger demand and the release of a new tranche of fuel export quotas, Reuters reported on Wednesday, citing people with knowledge of the plans. read more
This could be seen as a bullish signal for China’s crude demand, but even higher processing rates won’t translate into higher imports, at least immediately.
Rather, it’s more likely that any boost to crude imports would only come from December onwards, and any increase in refinery processing prior to then will be largely met from existing inventories.
This is because of the lags in the physical market, where cargoes are arranged months prior to delivery.
The vast majority of China’s crude imports for October and November will already have been arranged, meaning any boost could only come from cargoes able to be sourced and transported at short notice.
This could include volumes from some Southeast Asian producers and also from Russia, but increasing freight rates for crude oil tankers may limit any new purchases.
That said, China’s September crude oil imports are poised to rise above 10 million bpd, according to Refinitiv Oil Research, breaching that level for the first time since May, as refiners bought cargoes with prices softening after the initial surge in the wake of Russia’s Feb. 24 invasion of Ukraine. Moscow calls its actions “a special military operation”.
But a surge in imports in the fourth quarter would require China’s refiners to pay higher spot prices and also accept higher freight rates, which probably wouldn’t make economic sense.
Rather, if the mooted extra 15 million tonnes of export quotas are released, which is equivalent to roughly 120 million barrels of products such as diesel and gasoline, it’s likely crude already in China will be used to boost refinery processing.
Source: Reuters (Editing by Kenneth Maxwell)