Major oil exporters clearly would like higher crude prices and may even be getting closer to some sort of coordinated action, but they should be careful what they wish for as they may choke off demand growth in top importer China.
On the surface, China’s appetite for imported crude has seen robust gains this year, rising 13.5% in the first eight months to 250.45 million tonnes, equivalent to about 7.49 million barrels per day (MMbbl/d).
August was a particularly strong month, with imports the second highest on record in tonnes and the strongest since April on a barrels per day basis.
But it’s likely that the surging imports are a result of lower crude oil prices, rather than because of any sustained lift in actual fuel consumption in the world's second-largest economy.
This assumption can be made because it appears much of the extra crude being imported is going straight into strategic and commercial storage, or being re-exported as refined fuels.
The Chinese have a track record of buying for stockpiles when they deem prices to be cheap, and it appears they have accelerated inventory building this year.
The simplest way to get an idea of how much oil is flowing into storage is to add together China’s crude imports and domestic production, and then subtract the amount of oil being processed by refineries.
In the first eight months of this year the total crude available was 11.52 MMbbl/d and refinery runs totaled 10.65 MMbbl/d.
This leaves a gap of 870,000 bbl/d that has flowed into either commercial or strategic stockpiles.
Comparing this to the first eight months of 2015 shows that total crude available was 10.9 MMbbl/d, while refinery throughput was 10.4 MMbbl/d, a gap of about 500,000 bbl/d.
This implies that China has been building storage at a pace 370,000 bbl/d higher in the first eight months of 2016 than it was over the same period in 2015.
Chinese customs data shows that imports in the first eight months of the year were about 595,000 bbl/d higher than the same period last year.
If it can be assumed that inventories have been rising by 370,000 bbl/d more than they were in the first eight months of 2015, it means that only an extra 225,000 bbl/d has been imported and not put in storage.
But domestic crude output is down by 224,000 bbl/d in the first eight months of the year, meaning that the gain in imports that hasn't flowed into storage has merely offset declining local production.
China has also ramped up exports of refined products, shipping out a total of 29.74 million tonnes in the first eight months of 2016, a 42% rise on the same period in 2015.
Using the BP conversion factor of 8 barrels per tonne of products, this means that China's refined fuel exports have been about 290,000 bbl/d more in January-August this year than for the same period in 2015.
In other words, the increase in refined product exports, coupled with likely crude flows into storage and declining domestic oil production has more than offset the gain in crude imports.
China Buying More Responsive To Price
In some ways, this doesn’t actually matter much to producers, as China’s imports are still rising and this is providing some support to crude markets.
But it does mean that China’s crude imports are likely more vulnerable to higher prices than they were in previous years, when the country had to import more crude regardless of the cost because economic growth was running above 10% a year.
The Chinese have shown considerable flexibility in how they build up strategic petroleum reserves (SPR) storage, using commercial sites if needed, as Barclays pointed out in a Sept. 26 research note.
“In a low price environment, China’s stocking rate is likely to exceed the rate at which its SPR sites are built,” Barclays said. “This is because China is flexible in using its commercial storage facilities to store oil in the interim before transferring it to the SPR sites as and when they are completed.”
While China is only about a third of the way toward meeting its goal of having inventories equal to 90 days of crude oil imports, the implication is that Beijing will be flexible in how it goes about filling the rest of its SPR.
In practical terms, this means China will likely continue buying when prices are cheap, but may wind back if prices rise to a level deemed expensive.
Given that China now vies with the United States as the largest crude oil importer, especially on a net basis, any sign of slowing SPR builds would no doubt concern exporters.
But if any reduction in crude supply is merely matched by lower demand from major importers such as China, it may make the producers’ efforts a moot point.
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