LAUNCESTON, Australia- China resumed building crude oil stockpiles in the first quarter of 2022, but unlike previous periods of inventory builds the current additions are a bearish signal.
China likely added around 610,000 barrels per day (bpd) in commercial or strategic inventories in the first quarter of this year, according to calculations based on official data.
But the build in stockpiles is more a reflection of weaker refinery processing and softer fuel consumption. The world’s biggest importer of crude oil is imposing lockdowns in several major cities as part of China’s “zero-COVID” policy of dealing with the coronavirus pandemic.
China doesn’t disclose the volumes of crude flowing into or out of strategic and commercial stockpiles. But an estimate can be made by deducting the total amount of crude available from imports and domestic output from the amount of crude processed.
Crude imports were 10.37 million bpd in the first quarter, while domestic output was 4.15 million bpd, giving a combined total of 14.52 million bpd available to refineries.
Refinery throughput was 13.91 million bpd in the first quarter, meaning that refiners processed about 610,000 bpd less than supply available to them.
This represents an acceleration in storage flows, given that China added about 170,000 bpd to inventories over the whole of 2021, down sharply from 1.26 million bpd in 2020.
Up until last year China had been building up its strategic petroleum reserve (SPR), a bullish factor for global crude demand.
However, inflows into the SPR are believed to have slowed and China has even joined recent efforts by importing countries to lower crude prices by releasing barrels from the SPR.
It’s worth noting that both refinery processing and crude imports have been soft so far this year, with throughput declining 1.5 percent in the first quarter from the same period in 2021 and imports slumping 8.1 percent.
March’s refinery throughput of 13.8 million bpd was the lowest since October as refineries slashed processing amid high crude prices. The latter cut into profit margins given China’s retail fuel prices are still regulated.
Throw in weaker fuel demand from ongoing COVID lockdowns in several major cities – including the financial hub of Shanghai – and a bearish picture emerges for the trajectory of crude imports in coming months.- Reuters
While April’s imports are likely to be more or less steady compared with March’s, the increasing likelihood is that they will be soft from May onwards.
April’s imports are expected to be around 10.46 million bpd, according to Refinitiv Oil Research, slightly up from the official March figure of 10.06 million bpd.
April-arriving cargoes would have been arranged prior to the spike in global crude prices sparked by Russia’s invasion of Ukraine on Feb. 24, with Brent futures hitting a 14-year high of $139.13 a barrel on March 7.
China’s crude imports may decline in May, especially given the decision by top supplier Saudi Arabia to boost their official selling price for May cargoes to a record high premium above the regional Oman/Dubai benchmark.
The situation confronting China’s refiners is far from encouraging.
They are facing soft domestic demand, low profits and quota constraints on exporting refined fuels – even though exports would lift their overall profits given current strong margins, especially for diesel.
Already China’s refiners are paring back their processing. Industry sources say throughput could drop by about 900,000 bpd in April, equivalent to about 6.3 percent of the national average processing rate in the latest annual figures.