Summary: As oil demand once again faces the impact of the pandemic, the world's largest buyer appears to have 'returned.'
As oil demand once again faces the impact of the pandemic, the world's largest buyer appears to have 'returned.'
Many may recall that when oil prices fell to historic lows, China's crude oil demand made a huge contribution to the price recovery. From May to August, China's crude oil imports surged, marking the strongest four-month import volume on record. After that, China's crude demand began to weaken.
Now the situation has improved again. On Tuesday, data from the General Administration of Customs showed that China's crude oil imports in September reached 48.482 million tonnes, up 2% from August.
According to research by some institutions, China's crude oil imports may continue to grow in the coming months. This forecast is mainly based on two considerations.
The first is the movement of China's floating storage inventories. Research firm HFI Research pointed out that idle floating storage can be used to predict future Chinese crude oil imports. The chart below shows idle floating storage for more than 7 days, 15 days, and 30 days. Idle inventories of more than 7 days include some factors related to shipping backlogs, so the 15-30 day and above metric better reflects the true state of floating storage.
As shown in the chart, China's floating storage volumes are on a downward trend across all time frames. HFI Research said that based on the current trajectory, China's floating storage inventories fell by about 30 million barrels of crude oil in September. If the current trend continues, by the end of October, idle inventories of more than 15 days will decline to just 10 million barrels, while idle inventories of more than 30 days may be almost completely drawn down.
HFI Research believes this means China is likely to increase crude oil imports before early November, unless it intends to keep reducing inventories. Given that Brent crude oil prices are currently only in the $40s per barrel, this price is not high, and China has no reason to reduce inventories at this point. Therefore, HFI Research is firmly convinced that China will start importing more crude oil before early November.
So why did China not expand imports earlier? The reason is that large-scale imports in previous months caused tankers to queue up outside Chinese ports, with some having to wait more than a month to unload. This situation has now eased, which also explains why China's crude oil imports increased in September.
The increase in China's crude oil imports will push up Brent crude futures prices. At present, Brent crude prices are only slightly above $40 per barrel. HFI Research expects that if China's crude oil imports recover, Brent prices could reach $50 per barrel.
In addition, it is reported that some Chinese refiners have begun snapping up Middle Eastern crude oil. The Singapore subsidiary of Rongsheng Petrochemical Co. has purchased at least 7 million barrels of oil on the spot market so far this month, with delivery scheduled for December and January. The company is buying large volumes of crude to feed the trial runs of its expanded refinery this quarter. In addition, the second-phase expansion of its Zhoushan refinery is expected to double its daily processing capacity to 800,000 barrels per day.
As Chinese oil companies seek feedstock for new and expanded plants, China's crude oil imports in September posted their first increase in three months.
Oil traders said China's 'teapot' refineries will also increase crude oil purchases. Traders expect China's 'teapot' refineries to increase their crude purchases for January delivery, and some companies have already shown interest in spot purchases.
Note: In China, many small and medium-sized refineries are called 'Chinese teapot refineries.'
Earlier this year, 'teapot' refineries played a huge role in underpinning oil prices, after prices recovered rapidly from the pandemic and triggered a buying spree.
John Kilduff, partner at Again Capital LLC, said China's increased crude buying is just the shot in the arm the market needs.
This can to some extent offset weak crude demand in other regions. However, independent refiners' crude imports may find it hard to reach the June peak. Moreover, refining margins in most parts of the world continue to deteriorate, which is a bad omen for oil prices. The combined refining margin for gasoline and diesel fell to $9 per barrel on Tuesday, the lowest level since 2009. Falling refining margins will reduce refiners' demand for crude oil.
However, some analysts believe China's crude oil imports will find it hard to return to the levels seen in May. Seng Yick Tee, senior director at SIA Energy, said that in sharp contrast to the strong import growth in the second and third quarters, China's crude oil import growth in the fourth quarter may be curbed due to already high crude oil inventories.