Inventories, uneven demand and high prices could cap China’s crude oil imports in H2

Strong points

Destocking can last until September

The evolution of demand remains uncertain in the absence of a strong stimulus

Volatile Crude Threatens Private Refinery Quota Utilization

China’s crude oil imports in the second half will come under pressure from bloated domestic inventories, an uncertain demand recovery and fluctuations in global prices, factors that could reduce the chances of robust material inflow growth. commodities, analysts told S&P Global Commodity Insights on July 28.

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China’s petroleum product exports are also expected to fall year-on-year, which could potentially erode its appetite to ship and break more crude in the second half, they added.

A few analysts expected crude imports from Asia’s top consumer to top the 10.23m bpd level seen in January-June this year, but others said the situation may not be also pink. They estimated volumes could fall to around 10 million b/d, bringing the country’s total crude imports in 2022 below the 10.3 million b/d mark seen in 2021.

Platts Analytics estimates that average crude import volumes for the second half will be 10.4 million bpd, meaning crude imports will see near zero volume growth on the year.

These projections took into account the commissioning of PetroChina’s new Shenghong Petrochemical and Guangdong Petrochemical refineries.

China’s crude imports fell 3.1% year-on-year in the first half, with June imports hitting a 47-month low of 8.75m bpd due to falling demand in the second quarter as part of the containment measures related to COVID-19. June’s drop pushed crude oil inventories to a level not seen in nearly a year.

China’s crude inventories hit an 11-month high of 944.37 million barrels in May, the level falling slightly to 916.5 million barrels as of July 27, according to shipment data from Kpler. Kpler oversees 1.51 billion barrels of crude storage capacity in China.

First priority destocking

Nearly all analysts said Chinese refineries would eliminate high-priced crude stockpiles before introducing additional flows.

“State oil companies have suffered more from high inventories of crude purchased at high cost because they have forward contracts and an obligation to secure domestic supply. Independent refineries are taking more of a spot buying approach to respond to rapid demand,” said a Beijing-based official. says the analyst.

“Destocking activities will last until September, when the peak oil demand season finally arrives. We therefore expect China’s crude imports to not experience a noticeable rebound by then,” said a London-based analyst.

September and October are the typical peak months for the consumption of petroleum products when the Mid-Autumn Festival and the week-long National Day holiday take place, which boosts the demand for gasoline and jet fuel for the trips. Meanwhile, fall is also the season for harvesting, fishing, and construction activities that drive demand for diesel.

Domestic demand remains uncertain

The recovery in Chinese domestic demand has been slower than expected, capping refinery crude consumption. Data from S&P Global showed the country’s crude throughput in July paused after two consecutive monthly increases.

Gasoline and kerosene consumption increased during the ongoing summer vacation from the second quarter in unusually hot weather, but sporadic movement checks threaten that growth. Analysts have estimated that jet fuel demand has improved to around 60% of pre-COVID-19 levels.

However, the recovery of diesel was slow as demand from the agricultural sector weakened with the end of the summer harvest in July. Demand from the construction sector is also weak due to cash flow problems, refiners and analysts said. Tens of thousands of people are refusing to pay their mortgages for unfinished apartments, which is slowing housing construction in the country.

More importantly, Premier Li Keqiang said on July 19 that China will not use large-scale stimulus measures to achieve its economic growth targets this year, but will maintain specific macroeconomic policies while adjusting policy on coronaviruses.

This suggests less political pressure for a rebound in oil demand. China is unlikely to meet its 5.5% GDP growth target for 2022 — Platts Analytics predicts the world’s second-largest economy will grow 3.3% during the year.

In addition, Beijing is keen to reduce the outflow of petroleum products by issuing fewer export quotas to ensure domestic supply and fight global inflation while reducing emissions to meet the country’s net zero goals. The policy also restricts the country’s demand for crude.

Analysts generally expected the government to issue 5 million tonnes of petroleum product export quotas in the rest of the year. But even if this happens, the collective allocation will remain down 27% to 27.5 million tonnes for 2022 compared to the volume of 2021.

Crude import quotas

Analysts’ opinions were further divided on whether independent refiners could exhaust their import quotas. As a general rule, independent refiners aim to complete their annual quota by the end of the year to ensure sufficient quota is obtained in the coming year.

Based on imports from 33 crude quota holders that S&P Global is monitoring, and assuming they will be allocated the full volume in the third-round allocation, these refineries must increase their imports to 46 % in July-December to use all the quotas. for 2022, compared to the collection in H1.

Platts Analytics said that based on a robust recovery in demand in the second half, quota holders would also rush to bring in more rough around the fourth quarter to maximize their quota utilization.

“This will imply that crude imports will likely outpace domestic demand and refining cycles and reverse the decline in 2021. Naturally, as refiners step up to maximize quota utilization, bitumen blend imports will fall. on the sidelines,” Platts Analytics said in a statement. report.

However, two Beijing-based analysts said private refiners may reconsider their strategy this year to avoid holding high-cost crude stockpiles by the end of 2022, due to expectations of volatility in international crude prices during the winter heating season and uncertainties regarding the supply of Russian crude.

“The drop in crude import quota utilization in the first half of the year and volatile crude prices are making it more difficult than ever for independent refiners to complete quotas,” said one of the Beijing-based analysts.

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