By Clyde Russell, Reuters
China appears to be stockpiling crude oil at a faster pace than the market had expected, taking advantage of low prices but perhaps also pulling forward its demand for imported crude.
While China doesn't disclose the amount of crude flowing into strategic storage, an estimate can be made simply by subtracting refinery runs from the total amount of oil available from both imports and domestic output.
Domestic crude production dropped 5.6 percent in April from a year earlier to 16.59 million tonnes, equivalent to about 4.04 million barrels per day (MMbbl/d), the National Bureau of Statistics said on May 14.
This was the lowest rate on a daily basis since July 2013, and it brought the decline in the first four months of the year to 2.7 percent from the same period in 2015, with about 4.11 MMbbl/d being produced.
While lower domestic output in the world's fourth-largest producer shows China's oil firms aren't immune to the pressures of low prices, the shortfall has been more than made up by sharply higher imports.
Crude imports for the first four months of the year were 123.7 million tonnes, equivalent to about 7.46 MMbbl/d, and 11.8 percent higher than for the same period last year.
Taking imports and domestic output together, total crude availability in China for the January to April period was 11.56 MMbbl/d.
Total refinery throughput was 2.9 percent higher in the first four months at about 10.69 MMbbl/d.
This means that there was about 870,000 bpd of crude available that wasn't processed through refineries, meaning it most likely made its way into commercial and strategic storages.
This means that China is filling storages at a considerably faster pace than had been expected in a Reuters poll of analysts conducted in December.
According to the poll, China was seen adding 70 to 90 MMbbl to its Strategic Petroleum Reserve (SPR) in 2016, or about 245,000 bbl/d at the upper end of that range.
If all the surplus crude has indeed flowed into storage, it implies that about 105 MMbbl were added in the first four months alone, more than what analysts had expected for the entire year.
It is worth noting that some analysts had expected greater flows into the SPR, with Energy Aspects predicting 150 MMbbl for the year.
It would now seem that even optimistic forecasts may be exceeded, if China maintains the rate of crude imports directed for storage.
Import Growth To Ease?
China is currently filling its second phase of SPR, which has a capacity of 244.8 MMbbl, and Thomson Reuters Oil Research and Forecasts expects this process will be completed by the end of the year.
A planned third phase of undisclosed capacity is due for completion by 2020 as China works toward the goal of reserves equal to 90 days of imports.
It would appear that China still has the capacity to add more oil to its SPR in the coming months, but questions must be asked whether it can do so at the same pace seen in the first four months.
It's possible that storage flows may ease back in coming months, resulting in slower growth in crude imports.
This may already be happening, with Thomson Reuters Oil Research and Forecasts provisionally assessing May imports at 29.47 million tonnes, down from the 32.58 million reported by customs for April.
Higher oil prices may also help dissuade the Chinese from importing for storage, with Brent crude closing on Tuesday at $49.28 a barrel, some 77 percent higher than the lowest close of 2016 of $27.88 on Jan. 20.
Certainly, history suggests the Chinese tend to buy more when they deem prices to be cheap, and ease back when they believe prices have risen too far, too quickly.
This doesn't imply that China's imports of crude oil are going to reverse and head into negative territory, rather it suggests that the rapid growth in imports seen in the first four months of the year may start to ease.
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