August 24, 2020 [Hellenic Shipping News] – China’s massive build-up of crude oil inventories this year slowed somewhat in July, but remained elevated by historical standards as imports stayed near record levels.
One of the few bullish spots in the global oil market this year has been China’s ravenous appetite for crude, with imports for May, June and July being the highest three months on record.
And, after a blip caused by lockdowns in the first quarter to combat the spread of the novel coronavirus, refinery processing has also been ramped up to record levels.
What is less visible is that China has been adding to its crude oil stockpiles at a record pace as well.
China doesn’t disclose flows into the nation’s Strategic Petroleum Reserve (SPR) or commercial storage tanks, but an estimation can be made by deducting the amount of crude processed from the total amount of crude available from imports and domestic output.
China’s crude imports in July were 12.08 million barrels per day (bpd), while domestic output was 3.88 million bpd, giving total available crude of 15.96 million bpd.
Refinery throughput was 59.56 million tonnes, the highest for a single month, although in barrel-per-day terms the 14.03 million bpd in July was just below the record 14.08 million bpd achieved in June.
Subtracting the July refinery throughput from the total available crude leaves a gap of 1.92 million bpd, which likely flowed either to commercial storage or the SPR.
This is down from the 2.77 million bpd gap seen in June, but is in line with the average of 1.95 million bpd for the first seven months of the year.
This is more than double the flows into storage seen in the first seven months of 2019, when there was a gap of 940,000 bpd between total available crude and refinery processing.
The leap in storage flows so far in 2020 can be broken into two phases, the first being when China didn’t cut import volumes even though domestic fuel consumption took a massive hit during the COVID-19 lockdowns of the first quarter.
The second was the huge buying of cheap crude during the brief March-April price war between the two leading exporters of the OPEC+ group, Saudi Arabia and Russia.
That crude started arriving in late May and the last of it should be discharged this month.
IMPORT GROWTH TO SLOW?
What happens from September onwards is less clear. Will China continue to import large surpluses of crude, or will the higher prices of the last few months curb its appetite?
Will refineries continue to process record amounts of crude, especially if there is a slight hit to fuel consumption from the recent flooding in parts of China?
What about refined product exports? It has been profitable for Chinese refiners to use their export quotas to ship out product that exceeds the domestic market’s needs, but the coronavirus has caused demand in the rest of Asia to slip.
China’s refined product exports were 3.21 million tonnes in July, which works out to about 828,000 bpd using the BP conversion factor of one tonne of product to eight barrels.
This was down from 1.03 million bpd in June, and well below an average 1.4 million bpd for the first seven months of 2020.
With margins for gasoline and diesel currently soft in Asia, Chinese refiners may not be able to sell as much as they would like at prices that would ensure profits.
On the positive side, domestic fuel consumption appears to have strengthened, especially for diesel given the increase in construction activity in recent months as Beijing encourages spending on infrastructure and housing as part of the recovery from the coronavirus.
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