Thursday, October 27, 2016

Don’t underestimate China’s capacity to import crude oil

The above is an extract from an upcoming quarterly report on the outlook for the tanker market by Richardson Lawrie Associates Ltd (RLA), a firm of international maritime economists and business consultants. More information can be found at

For much of the year, there have been concerns that the slowing pace of Chinese economic growth and burgeoning refined product stocks would lead to a softening in China’s appetite to import oil. However, the latest figures for September show a record level of imports (8.04 million b/d) up 18 per cent year-on-year. As shown in the chart below, we estimate that China’s full year imports are set to increase by 14 per cent, which is by far the fastest rate of growth this decade.

There are a number of factors underpinning the surge in imports, including the significant volume of deliveries generated by contracts signed in July when renewed selling pressure pushed crude below $42 a barrel, the decline in Chinese domestic crude oil production, and rekindled activities from refineries – including teapot refineries ‒ looking to increase deliveries as the maintenance season comes to an end. However, perhaps the most important factor is China’s apparently insatiable hunger to add to its storage reserves during the current era of low oil prices.

One reason why stocking is not more often proclaimed as the potential saviour of Chinese import demand is because the exact size of Chinese reserve capacity is uncertain.

Despite occasionally releasing data, China is under no obligation to provide accurate storage numbers – whether SPR or commercial – and this has created problems with estimating China’s crude oil demand because nobody really knows what the storage capacity is. Some commentators, like JP Morgan, believe that China’s reserves are full, while others, like Orbital Insight and Energy Aspects Ltd, believe that China has much greater reserve capacity than previously thought and will keep filling it while prices are low. The difference between these positions is equivalent to an adjustment in China’s forecast crude oil import demand estimates of 1.1 million b/d.

So opaque is the information about Chinese reserve capacity that, eschewing the occasional official pronouncements, monitors are forced to rely on counting ships or studying satellite imagery. For example, Orbital Insight calculates China’s unreported oil supplies and oil storage capacity by analysing high-resolution satellite images of the country’s storage facilities. The company uses algorithms to quantify oil supply and oil capacity by monitoring the changing shadows cast by the floating roofs of the storage tanks, which rise as supply increases and fall as supply decreases.

Despite the best efforts of monitors, they may still fail to capture the complete picture of the size of Chinese reserve capacity. For example there are accounts that the government has been building an additional network of emergency storage sites dotted around the country, which include underground caverns by the Yellow Sea and a scattering of islands in the Yangtze River delta.

The reason China chooses to keep the details of its storage capacity partially obscured is probably that it sees commercial advantage in this strategy. Whatever the reason, it is certainly giving the market pause for thought, and it may just be that while oil prices remain low, China will continue to maintain high levels of crude oil imports, thus providing an important support to tanker freight rates over the coming months.

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