China’s flow of crude oil into storage accelerated in September, reversing two months of declines, as the world’s biggest importer of the fuel continued to work its way through massive volumes purchased during a brief April price war.
The flow of crude into commercial and strategic stockpiles was about 1.75 million barrels per day (bpd), according to calculations based on official data for crude imports, domestic output and refinery runs.
China doesn’t disclose flows into the nation’s Strategic Petroleum Reserve (SPR) or commercial storage tanks, but an estimation can be made by deducting the amount of crude processed from the total amount of crude available from imports and domestic output.
China’s crude output was 16.1 million tonnes in September, while imports were 48.48 million tonnes, giving total available crude of 64.58 million tonnes, or about 15.71 million bpd.
Refinery throughput in September was 57.35 million tonnes, equivalent to about 13.96 million bpd, leaving the difference between the two at 1.75 million bpd.
That was up from 1.1 million bpd in August, but lower than 1.92 million bpd in July, and well below the 2.77 million bpd seen in June.
The September storage flows were also slightly below the 1.83 million bpd average for the first nine months of the year, although still higher than the 940,000 bpd for 2019 as a whole.
The rise in flows into storage tanks in September was largely driven by higher crude availability, given that refinery processing was more or less steady, with September’s 13.96 million bpd only just below August’s 14.0 million bpd.
September crude imports were 11.8 million bpd, up 620,000 bpd from 11.18 million bpd in August, and also marking the fifth consecutive month imports have exceeded 11 million bpd.
It’s no secret that the high levels of crude imports by China are the result of a buying spree during the brief price war between top exporters Saudi Arabia and Russia in April.
That price war, coupled with the economic hit caused by lockdowns to combat the spread of the novel coronavirus, sent global benchmark Brent crude to the lowest in 17 years in late April.
While the Saudis and Russians, and other members of the group known as OPEC+ soon reached an agreement to extend and deepen crude output cuts, the price war allowed China to gorge on cheap oil.
So much oil was purchased that tankers were waiting for more than a month outside Chinese ports to discharge cargoes.
However, the overhang of imports is almost over, with Refinitiv Oil Research estimating about 2.7 million tonnes, or about 635,000 bpd, remains to be offloaded in October.
WHAT WILL “NORMAL” LOOK LIKE?
With imports likely to return to more “normal” levels from November onwards, it’s also likely that China’s storage flows will drop as well.
What’s not clear is whether Chinese refiners will prefer to use up accumulated inventories over the northern winter, or whether they will continue to import crude at rates more akin to the 10.5 million bpd level that prevailed prior to the coronavirus outbreak.
While China’s fuel demand has largely recovered since the lockdowns of the first and second quarters, it also seems evident that refiners are capping monthly processing at around 14 million bpd.
Even this level likely exceeds actual domestic consumption, meaning fuel inventories are probably increasing as well.
This is especially the case since China’s refiners are unable to export excess refined products, given weakness in much of the rest of Asia, where several countries are still battling to control the coronavirus pandemic.
Exports of refined products were 3.95 million tonnes in September, down 7.7% from August’s 4.27 million and 30.5% weaker than the 5.68 million tonnes in September 2019.
The risk for crude oil prices, and for products too, is that China has built up large inventories of both and will take some time to work through the excess.