China’s oil-buying prowess returned in a major way last month when crude imports set an all-time high.
But what’s behind the surge? Strong refinery demand? Or opportunistic buying of Iranian crude?
The answer could tilt the global supply-demand balance considering China’s size. It could also provide some clarity for traders who seem divided over underlying market conditions.
The financial community remains concerned about global oil demand in light of trade tension.
Physical traders, on the other hand, are betting that supply losses from OPEC members will tighten the balance in the second half of 2019.
Who is correct? With so many conflicting factors, it’s easy to see why crude futures have been bound in a tight range.
What could dislodge prices — either higher or lower — is whether the story from China is fundamentally bearish or bullish.
Let’s first take a look at Chinese crude inventories, which have shot higher since mid-April. Those builds come on top of increases seen from December through January.
Source: Ursa
One reason why inventories increase could be a decline in refinery demand. But that doesn’t appear to have been the case recently.
In fact, Chinese crude throughput in April matched the all-time high set in January at 52.1 million tons or 12.7 million barrels per day, according to official data from the National Bureau of Statistics.
The factors causing higher runs include the start-up of a 400,000-bpd refinery in northeast China owned by Hengli Petrochemical Co Ltd, the end of scheduled maintenance and export growth for refined products.
Chinese government data is believed to usually under-estimate refinery activity.
In collaboration with ClipperData, we combine crude flows and storage data to produce a weekly report on Chinese refinery demand.
Our calculations also showed strong refinery demand in April. Implied refinery runs averaged 14.1 million bpd last month, the highest since our data began in December 2016.
If not refinery demand, then what’s behind the increase in Chinese crude inventories? Imports.
The amount of crude imported by China averaged 10.7 million bpd in April, a record high and up from 9.3 million bpd in March, according to preliminary data from the General Administration of Customs.
Source: General Administration of Customs
One factor likely fueling Chinese imports was the desire to pull in as much Iranian supply as possible before it was too late when US sanctions waivers expired early May.
China’s imports of Iranian crude averaged 800,000 bpd in April, the most since August.
Bloomberg reported May 17 that at least three Iranian-owned VLCCs were anchored off China’s coast while a few other vessels appeared en route, signaling China as their final destination.
Secretary of State Mike Pompeo said in a press conference some “incidental” shipments from Iran may still arrive after waivers expired.
Assuming China soon cuts off imports from Iran, the question then becomes whether total Chinese import demand also falls? Or will China turn to another supplier, such as Saudi Arabia, to make up for the lost barrels?
The outcome will result in a chain reaction impacting stocks outside of China, which matters greatly at a time when inventories are being scrutinized.
Global crude inventories will determine whether OPEC and its non-member allies will extend a production cut agreement beyond June.
That’s what Saudi energy minister Khaled Al-Falih after a committee meeting tasked with overseeing the coordinate output pact.
“This second half, our preference is to maintain production management to keep inventories on their way declining gradually, softly but certainly declining towards normal levels,” Al Falih-told reporters May 19 in Jeddah.
Al-Falih didn’t get into specifics, but he was likely referencing stocks in developed economies.
According to the latest OPEC data, OECD commercial crude stocks rose by 23.4 million barrels in March to 1.454 billion barrels, a surplus of 48.3 mbls year-on-year and 20.3 mbls above the five-year average.
But what has happened since March? Are OECD stocks still building? What is the regional breakdown?
We have a timely pulse on OECD stocks — as well as stocks outside OECD — as part of our weekly measurement of global crude inventories using synthetic aperture radar (SAR).
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