Chinese refiners recently made a surprising move by dipping into crude oil inventories for the first time in 18 months. High processing rates had outpaced the volume of crude available from imports and domestic output. This development raises questions about whether it signals a new trend or is merely a temporary occurrence driven by specific factors.
In April, Chinese refiners processed a substantial 61.1 million tonnes of crude, equivalent to 14.87 million barrels per day (bpd), the second-highest on record. March had set an all-time peak at 14.9 million bpd. However, the volume of crude available from imports and domestic output during April stood at 59.71 million tonnes, equivalent to 14.53 million bpd. By deducting the amount of crude processed from the total available, it becomes evident that the crude flows into or out of strategic and commercial stockpiles saw a deficit for the first time since November 2021.
For the first quarter of 2023, China had been consistently adding around 770,000 bpd to its commercial or strategic storages. However, the draw on inventories in April led to a reduced rate of 480,000 bpd for the first four months. This raises the question of whether dipping into stockpiles is the start of a new pattern or a consequence of temporary factors.
China’s refiners have been running their plants at higher capacities to meet rising domestic demand for fuels as the economy gradually reopens from COVID-19 lockdowns. Furthermore, additional quotas granted by the government have boosted refined fuel exports, allowing refiners to capitalize on strong margins, particularly for diesel, in the first quarter. However, several factors may impact the level of product exports in the coming months.
Refiners are likely to prioritize meeting domestic needs over exports. Moreover, profit margins for refined fuels in Asia have significantly declined recently, and Beijing’s second round of export quotas is less than half of the initial allocation. Despite potential shifts, the outlook for refining volumes in China remains positive, with a recovering domestic market and expected solid product exports, albeit at lower volumes than the surge witnessed in the first quarter.
Turning to crude imports, April saw the lowest arrivals since January, potentially due to refiners reducing crude purchases during the traditional maintenance period. This decline could also reflect the uneven nature of China’s economic recovery. While consumer spending and travel have boosted fuel consumption, softer manufacturing and a sluggish construction sector have dampened demand for diesel.
China’s crude import decisions are influenced by price dynamics. Historically, Chinese refiners have responded to high or rapidly increasing crude prices by importing less and tapping into stockpiles. Conversely, during periods of low prices, they tend to purchase more than necessary. The lag between crude purchases and physical delivery, which can span up to three months, is also a factor to consider. The unexpected additional 1.16 million bpd output cut announced by the OPEC+ group in April briefly spiked global benchmark Brent futures to $87.49 a barrel on April 12. However, the price has since fallen back to $75.86 a barrel, below the level when the production cut was implemented.
Looking ahead, crude oil imports are expected to recover in May. Refinitiv Oil Research estimates arrivals of 11.83 million bpd, representing a significant jump of 1.53 million bpd compared to April. The end of refinery maintenance and expectations of strong economic growth are the main drivers behind this projected increase in imports.
China’s role in the global oil market remains crucial, with its demand patterns and import decisions exerting a significant impact on prices and trade flows. While the draw on inventories in April raises questions about the sustainability of the trend, it is still uncertain whether it indicates a long-term shift or a temporary adjustment. The future direction of China’s refining industry will be influenced by various factors.
The domestic market in China is expected to continue recovering, and product exports are likely to remain solid, albeit at lower volumes than the exceptional levels seen in the first quarter. However, refiners may prioritize meeting domestic needs over exports due to declining profit margins and reduced export quotas. This shift could potentially taper off the high levels of product exports in the coming months.
On the crude import side, fluctuations in China’s import volumes reflect not only the global price environment but also the country’s economic performance and sector-specific demand. The recent decline in crude imports could be attributed to the traditional maintenance period and the uneven nature of China’s economic recovery. Manufacturing and construction sectors have been relatively sluggish, affecting the demand for diesel.
China’s refiners have a track record of adjusting their crude import levels in response to price movements. When crude prices rise too high or too quickly, they tend to import less and utilize stockpiles. Conversely, during periods of low prices, they increase their purchases. The timing of crude purchases and physical delivery also plays a role, with a lag of up to three months.
Looking forward, it is expected that crude oil imports will rebound in May, driven by the end of refinery maintenance and expectations of strong economic growth. However, the overall trajectory of China’s crude import requirements will depend on factors such as the pace of economic recovery, sector-specific demand, and global price dynamics.
In conclusion, the recent dip into crude oil inventories by Chinese refiners has generated speculation about its implications for the market. While the outlook for China’s refining volumes remains positive, the sustainability of the trend and the direction of crude imports are uncertain. Factors such as domestic demand, profit margins, government policies, and global price movements will shape the future of China’s refining industry and its role in the global oil market. Observing how these factors evolve in the coming months will provide a clearer understanding of whether the dip into inventories represents a lasting trend or a temporary adjustment in response to prevailing market conditions.