China’s refineries imported and processed record amounts of crude oil in June, and while these are undoubtedly bullish economic signals, it’s worth noting that flows into storage tanks were also likely at an all-time high.
The massive amount of crude being stored in China may end up weighing on oil imports from August onwards, even with the nation’s recovery in domestic consumption.
China’s refinery throughput was 57.87 million tonnes in June, equivalent to 14.08 million barrels per day (bpd), which eclipsed the previous record from December 2019 and was up 9% from June of last year.
While China doesn’t provide data on flows into both commercial and strategic storages, an estimation can be made by deducting the amount of crude processed from the amount available from both imports and domestic output.
Imports in June were 53.18 million tonnes, or about 12.9 million bpd, a second consecutive monthly record. Domestic production was 16.24 million tonnes, or about 3.95 million bpd.
Put the two together and the total crude supply available in June was about 16.85 million bpd, or 2.77 million bpd more than what was processed by refineries.
Given the absence of official data on storage flows, it cannot be confirmed that this is a record, but based on calculations it’s likely that more crude oil went into storage in June than in any other month.
June’s storage flows were outsized in comparison to the already significant volumes going into inventories in the first five months of the year, with calculations showing 1.88 million bpd being stored over January to May.
What China has been doing is taking advantage of low crude prices that prevailed earlier this year amid the global economic slowdown caused by the coronavirus pandemic and a price war between the two leading exporters, Saudi Arabia and Russia.
When coronavirus lockdowns began across China, there were fears that crude imports would slump as consumption dropped.
This didn’t happen, however, as Chinese refiners simply diverted crude they had ordered into storage.
When the brief price war broke out between the Organization of the Petroleum Countries and its allies in the group known as OPEC+, China decided to buy large volumes of crude at prices that were close to the lowest in two decades.
The surge of imports in May and June, and that is likely to extend into July, is the result of this buying splurge.
IMPORTS TO MODERATE?
So, what happens next?
It’s clear that even with record refinery processing, China has been storing large volumes of crude oil.
It’s possible the bulk of this went into strategic storage, but some may be in commercial tanks to be used instead of fresh imports in coming months.
It’s also possible China’s Strategic Petroleum Reserve (SPR) is close to maximum capacity and that purchases for storage will slow over the rest of 2020.
With crude prices having staged a recovery from their April lows, China may also judge crude to no longer be the bargain it was, especially given the uncertainty over global demand amid the ongoing pandemic.
Brent crude was trading around $42.91 a barrel in early Asian trade on Monday, up some 168% from the intraday low of $15.98 on April 22, but still some 40% below the intraday peak this year of $71.75 on Jan. 8.
While crude is still cheap compared to prices that prevailed for much of 2019, the risk is that Chinese imports pull back somewhat from August onwards.
Even though domestic consumption appears to have bounced back to pre-coronavirus levels, Chinese refiners may have stored enough crude, and furthermore may struggle to sell excess refined fuels to regional markets.
Despite the record processing in June, exports of refined products were stagnant at 3.88 million tonnes, a tiny drop from May’s 3.89 million but down 28.6% from 5.43 million tonnes in June last year.
It’s not certain that strong domestic fuel consumption will be enough to keep China’s appetite for crude imports as strong as it has been.