August 19, 2021 [Reuters] – China drew on crude oil inventories in July, marking the fourth consecutive month it has processed more crude that what was available from domestic output and imports.
The call on inventories was smaller in July than in the previous two months, but this was more a reflection of weak refinery processing rates rather than any underlying boost to demand.
China, the world’s biggest oil importer, appears to have taken about 223,700 barrels per day (bpd) from reserves in July, according to calculations based on official data.
The country doesn’t disclose the volumes of crude flowing into strategic and commercial stockpiles. But an estimate can be made by deducting the total amount of crude available from imports and domestic output from the amount of crude processed.
Refiners processed 59.06 million tonnes in July, a 14-month low and down from a record 60.82 million in June, according to data released on Monday by the National Bureau of Statistics.
Domestic output was 16.87 million tonnes, while imports were 41.24 million, giving a total 58.11 million tonnes of crude available to refiners.
Subtracting the crude available from the processing volume leaves a deficit of 950,000 tonnes, which is equivalent to about 223,700 bpd, using standard conversion factors.
The small draw in stockpiles in July followed larger calls on inventories of around 980,000 bpd in June, 589,000 bpd in May and 280,000 bpd in April.
China has in recent years been rapidly building up its strategic petroleum reserve (SPR) and commercial stockpiles have also grown as new refineries come online and have to build up working inventories.
However, refiners started to draw on stockpiles in October last year, and have called on inventories in six of the last 10 months.
China snapped up large volumes of crude when prices plunged to two-decade lows during the coronavirus pandemic, which coincided with a brief price war between top exporters Saudi Arabia and Russia in March last year.
China imported so much crude in the middle part of last year that it resulted in long vessel queues outside ports, and it struggled to offload the cargoes.
Refiners appear to have taken the view that crude oil prices have risen too far too fast as the output restrictions by the OPEC+ group of exporters saw benchmark Brent futures surge some 387% from the pandemic and price war low in April last year to a 2021 high of $77.84 a barrel on July 6.
Since then crude prices have trended lower, with Brent ending at $69.51 a barrel on Monday as the market starts to retreat from its bullish view amid the reality of weak demand in China, and much of the rest of Asia as the top-importing region continues to battle the coronavirus pandemic.
It’s not just high prices that are affecting China’s crude oil imports and refinery throughput.
Processing rates at smaller, independent refiners were lower in July as they faced tightening quotas and increased taxes on what is known as bitumen blend, which had been a popular feedstock for some independent refiners.
The increased official scrutiny of imports and a renewed coronavirus outbreak in China may serve to keep crude imports and refinery processing muted in August.
However, cheaper crude prices and the emergence of discounts on physical cargoes may be enough to tempt some major refiners to purchase more cargoes, although whether they will resume stockpile builds remains an open question.