August 29, 2022 [Reuters] – China is inadvertently helping ease tightness in the crude oil market through declining imports, and by favouring cargoes from exporters being shunned by much of the rest of the world.
China, the world’s largest oil importer, seems set for another soft outcome in August, with Refinitiv Oil Research estimating arrivals of 8.33 million barrels per day (bpd).
This would be below the official customs data figure of 8.79 million bpd in July and the 8.72 million bpd in June.
For the first seven months of 2022, China’s crude oil imports were 9.98 million bpd, down 4% from the same period last year.
Looking at the monthly data and it’s clear that after a reasonable start to the year, China’s oil imports started to slump from June onwards.
There are several factors behind China’s recent weakness in crude oil imports.
Domestic fuel demand has been hit by strict COVID-19 lockdowns in several cities in the second quarter, and the relatively modest bounce back in economic activity since these have been largely lifted.
Refinery processing has also been lower because of a lack of export quotas for products, which has meant Chinese refiners have been unable to take full advantage of the tight regional markets for fuels, especially diesel.
High crude prices in the wake of Russia’s Feb. 24 invasion of Ukraine are likely to have deterred oil purchases as well, with Brent crude futures trading above $120 in May, at a time when cargoes from June and July delivery would have been arranged.
China crude oil imports vs from Saudi Arabia, Russia
The question is what would the state of the global crude oil market be if China had continued importing at the level it was in the first five months of 2022, namely more than 10 million bpd?
There is little doubt that the global market would have been substantially tighter and prices would have been under strong upward pressure.
Another factor worth noting is from where China is sourcing its crude oil, with a notable shift occurring in recent months.
Russia was China’s top supplier in July for a third month, with imports via pipeline and tankers coming in at 1.68 million bpd, according to customs data released on Aug. 20.
Chinese refiners have been willing buyers of steeply discounted Russian crude, snapping up cargoes that would likely have gone to countries like Japan and South Korea prior to Moscow’s attack on Ukraine.
For the first seven months of the year China’s imports from Russia have totalled 1.67 million bpd, just behind traditional top supplier Saudi Arabia’s 1.72 million bpd.
Slightly more murky is China’s imports from Iran and Venezuela, both of which are under U.S. sanctions.
China didn’t report any purchases in July from either country, but its customs data lists imports of 787,000 bpd from Malaysia.
This figure is largely assumed by market participants to mainly be oil from Iran and Venezuela, especially since Malaysia’s total crude production has been averaging under 600,000 bpd this year, according to data from the U.S. Energy Information Administration.
Currently it suits the United States and other Western nations to turn a blind eye to China’s imports from Iran and Venezuela because if Beijing really did buy zero barrels from the two producers, it would significantly tighten the global market.
It should also be pointed out that China isn’t helping ease tightness in the global crude market out of the goodness of its heart, rather pure economics are at work.
China is buying cargoes from Russia, Iran and Venezuela at discounts to what it would pay from its other suppliers.
As long as these discounts are on offer, and customers for Russian, Iranian and Venezuelan crude are limited by geopolitics, then Chinese refiners are likely to continue to buy.
Making the global crude market somewhat less tight is just a side benefit that nobody really wants to talk about.
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