LAUNCESTON, Australia, Jan 10 (Reuters) – There is a rather simple narrative gaining currency in the crude oil market that China’s re-opening from COVID-19 is bullish for prices.
But the problem with one-dimensional views is that they ignore the myriad of other factors at play in the world’s biggest importer of crude.
Some of these are indeed bullish, others perhaps not so much, but the overall message is that China’s oil demand is not quite as locked in as the market appears to think.
The latest cog in the bullish machine is China granting a second round of 2023 crude oil import quotas, which are 20% above what was made available to refiners at the same time last year.
According to a document from the Ministry of Commerce, reviewed by Reuters on Monday, 44 mostly independent refiners were given 111.82 million tonnes in import quotas, adding to a first round of 20 million tonnes in 2023 quotas granted in October last year.
The theory is that refiners are being allowed to import more crude in order to meet any increase in domestic fuel demand, but more importantly, to allow them to increase exports of refined fuels.
Boosting product exports is in some ways an easy economic stimulus for Beijing, as it allows refiners to capture some of the strong margins for refined fuels in Asia and the rest of the world, particularly for diesel.
China has already increased export quotas for refined products, with 18.99 million tonnes issued already, up 46% from the same period last year.
The question then becomes if China does increase crude oil imports, is it still bullish if much of the extra volumes are being exported in the form of refined fuels?
The answer is while any increase in China’s crude oil imports may drive crude oil prices higher, a corresponding increase in fuel exports may weaken regional refining margins.
If margins for refiners outside China drop, it becomes possible that they will lower processing rates and demand less crude.
In other words, there are many moving parts to the overall balance between China’s crude import demand and regional fuel markets.
Another question to ask is where is China sourcing its crude from, especially now that Russian oil is largely disconnected from global markets as a result of the Group of Seven nations price cap and the European Union ban on imports.
If China’s independent refiners boost crude oil imports mainly from Russian crude, is that still bullish for oil prices linked to the main global benchmarks of Brent and West Texas Intermediate?
China’s crude imports for December were assessed by Refinitiv Oil Research at 10.93 million barrels per day (bpd), down from 11.42 million bpd in November, but up from October’s 10.20 million bpd.
Saudi Arabia regained the top supplier slot with 1.85 million bpd in December, ousting Russia, which supplied 1.51 million bpd.
Russia and Saudi Arabia have tag-teamed as China’s biggest supplier since the middle of last year, when Chinese refiners stepped up purchases from Russia amid steep discounts as Western buyers shunned its
Moscow’s Feb. 24 invasion of Ukraine.
China has the capacity to increase imports of Russian crude, even from the country’s distant western ports, given its access to tankers. That means
independent refiners may use their import quotas to buy cheaper Russian cargoes, rather than rely on traditional suppliers in the Middle East, Africa and the Americas.
CRUDE IMPORTS RECOVERING?
Another point is that so far there is little evidence that China’s crude oil imports are recovering.
While November was a strong month, December wasn’t especially robust and January is looking modest as well, with Refinitiv expecting sea-borne volumes to be lower this month than in December amid signs of a weaker manufacturing sector.
Of course, physical oil is generally bought several months ahead of actual delivery, and so far traders aren’t reporting a surge in demand from Chinese refiners, rather a picture of imports from countries other Russia being steady.
Much will depend on prices, as China has in the past shown a willingness to use commercial and strategic inventories to reduce imports, even if these moves aren’t discussed publicly.
China doesn’t disclose its stockpiles, but it likely added to inventories in 2022 even as total crude oil imports declined.
An estimate of oil flowing into storage can be made by subtracting the volume of crude processed from the amount available from imports and domestic output.
For the first 11 months of last year this was around 700,000 bpd, meaning Chinese refiners likely have the ability to draw on inventories should they deem crude prices have risen too high.
China’s crude oil demand isn’t necessarily a one-way bullish street, even if the re-opening from COVID-19 is a success.
Rather, what’s important is the interplay between crude imports, inventory builds, prices and refined fuel exports, not to mention the wider state of China’s and the global economy.
Editing by Sam Holmes
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