China’s record-breaking crude oil imports supported oil prices through the late spring and summer when oil demand recovery in the rest of the world had just started and then wobbled amid concerns of a second COVID-19 wave. But can the oil industry continue to rely on this support?
China imported record volumes of crude oil in May and June, as the oil-hungry nation attempted to benefit from the low oil prices in April. The imports in July, however, were lower than in June. Still, they were 25 percent higher than in July last year.
But China’s feast on low oil prices may now be over.
This month, China will import what could be the last of the bargain cargoes that refiners had snapped up in April. After August, however, it is anyone’s guess what will happen with Chinese crude oil imports.
On the one hand, factors that would support relatively high Chinese crude oil imports through the rest of the year include evidence that China’s fuel demand seems to have rebounded nicely and signs that China will increase its purchases of U.S. crude oil in an attempt to fulfill its promise laid out in the Phase 1 trade deal.
On the other hand, factors that could slow China’s crude oil imports over the next few months include higher oil prices compared to April lows, and weak fuel demand and refining margins in the rest of Asia, which could discourage Chinese refiners from exporting a lot of fuel to the region.
Then there is always the big unknown with China’s commercial and strategic reserves. Since China does not report inventories, analysts are only guessing how much crude oil China is stashing away in its strategic and commercial reserves.
Going forward, it is unclear how much oil China would import–and consequently stash–as many different factors could tip the scales either way.
Among the factors that could continue to support relatively high Chinese crude oil imports, and thus support oil prices, is the recovering industrial activity, incentivized by government stimulus for infrastructure projects. Analysts believe that industrial activity and increased road freight and e-commerce deliveries are set to push up China’s diesel demand to a record high this year.
In another bullish factor for Chinese imports, and potentially oil prices, China is reportedly ramping up purchases of U.S. energy products, including crude, as part of the U.S.-China trade deal. Oil traders from the U.S. and importers from China told Reuters earlier this month that China’s state oil giants had tentatively booked tankers for plans to buy at least 20 million barrels of American in August and September.
Considering that China is estimated to have fulfilled just 5 percent of the targeted purchases of American energy products in the first half of 2020, increased purchases, including of U.S. crude, in the second half of the year could keep Chinese crude oil imports at relatively high levels.
Yet, there are bearish factors at play that could dampen Chinese appetite for crude imports for the rest of the year, possibly weighing on oil prices, too. Those include weaker fuel demand recovery in the rest of Asia, which weighs on the refining margins in the region. This could discourage China’s refiners from continuing to process record volumes of crude oil.
In July, China’s refinery production hit a record high of 14.03 million bpd, official data reported by Reuters showed after major refineries returned online from maintenance.
Yet, with weak margins and fuel demand in the rest of Asia, refiners may not have much incentive to process record amounts of crude oil if there is no market in Asia to absorb all those refined products.
China’s record crude imports have been supporting oil prices in recent months. Now analysts and the market are wondering if Chinese purchases could continue to do so in the coming months.
According to estimates from Reuters columnist Clyde Russell, based on calculations of Chinese imports plus domestic production, less refinery throughput, China likely sent 1.92 million barrels per day (bpd) into its reserves in July. This was much lower than the estimated reserve fill in June of 2.77 million bpd, but close to the average for the January-July period reserve stockpiling of 1.95 million bpd, Russell estimates.