April 17, 2021 [Financial Post] – China boosted the flow of crude oil into storage tanks in March as strong imports and domestic output exceeded an increase in the volume of fuel being processed by refiners.

About 1.63 million barrels per day (bpd) of crude was directed into commercial and strategic inventories last month, up from about 920,000 bpd in the first two months of 2021, according to calculations based on official data.

The increase in storage was mainly a reflection of rising crude imports in March, which reached 11.69 million bpd, above the 11.08 million bpd reported by customs for the first two months of the year.

Domestic crude output was also higher in March at 4.02 million bpd, up 3.3% from the same month last year, and also above the 3.89 million bpd in the first two months of 2021.

China doesn’t disclose the volumes of crude flowing into strategic and commercial stockpiles. But an estimate can be made by deducting the amount of crude processed from the total amount of crude available from imports and domestic output.

China’s refineries processed 59.79 million tonnes of crude in March, equivalent to about 14.08 million bpd, according to data issued by the National Bureau of Statistics (NBS) on April 16.

This was slightly below the 14.13 million bpd from January and February, but 19.7% above what was processed in March last year.

However, caution is warranted with year-on-year comparisons given that China’s economy was largely locked down in March last year as the authorities moved to combat the spread of the coronavirus.

Putting crude imports together with domestic production results in about 15.71 million bpd of oil being available to refiners, leaving a gap of 1.63 million bpd once the throughput is subtracted.

The volume of crude being stored in March was above the recent trend, given that inventory flows for the whole of 2020 were about 1.29 million bpd.

Last year was notable for storage inflows as China snapped up large volumes of crude when prices plunged during the coronavirus pandemic, which coincided with a brief price war between top exporters Saudi Arabia and Russia.

China imported so much crude in the middle part of last year that it resulted in long vessel queues outside ports, as the world’s biggest crude buyers struggled to offload cargoes.

By the end of last year Chinese refiners tapered imports as they exhausted permits, resulting in rare inventory draws in October and December.

STORAGE TO EASE?

It was always likely that China would resume storing crude, given the market view that the strategic petroleum reserve (SPR) is still below target and the need for fresh commercial inventories as new refineries are built and come online.

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The question for the market is whether these flows will remain as robust as they have been in recent months, or whether they will start to taper as the SPR nears completion.

Another complicating factor is that the crude that arrived in China in March was most likely bought in late December or early January, at a time when the global benchmark Brent contract was in a range around $50-$56 a barrel.

It has since rallied, partly as the producer group known as OPEC+ extended production cuts and partly on optimism that the global economy is recovering from the pandemic.

Brent closed at $66.77 a barrel on April 16, and reached a 14-month high of $71.38 on March 8.

The contract was also above $60 during the time that Chinese refiners would have been buying cargoes for April, May and June delivery.

The question is whether the higher crude price will be enough to temper China’s appetite to buy additional crude for storage, and whether refiners are likely to import volumes more in line with what they aim to process.

There is some early evidence to suggest this may be the case, with Refinitiv Oil Research estimating that China will import around 10.91 million bpd in April, which would represent a 6.7% decline from March’s official volume.

The lower imports expected for April are also a reflection that several Chinese refineries tend to undertake maintenance shutdowns in the month.

But there may also be an element of reluctance to buy at prices that Chinese refiners may consider too high, especially since refinery profits are still under pressure from a recovery in fuel consumption that so far has been more anticipated than actually delivered.

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