LAUNCESTON, Australia, April 20 (Reuters) – China’s refineries processed more crude than ever before in March, but despite this record the world’s largest oil importer still boosted inventories.
China’s refinery throughput hit an all-time high of 63.9 million tonnes in March, equivalent to about 15.11 million barrels per day (bpd), up from 14.36 million bpd in the first two months of the year.
However, the amount of crude available to refiners from imports and domestic output also rose in March, reaching 16.67 million bpd, according to calculations based on official data.
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 amount of crude processed from the total of crude available from imports and domestic output.
Crude imports in March were 12.37 million bpd, while domestic output was 4.30 million bpd, giving a combined total of 16.67 million bpd.
Subtracting the refinery throughput leaves 1.56 million bpd that likely flowed into either commercial or strategic inventories.
This was an increase in the amount available for stockpiles from the first two months of the year, when the surplus was 270,000 bpd.
For the first quarter as a whole, China added about 770,000 bpd to inventories, slightly more than the 740,000 bpd average for all of 2022.
The question for the oil market is what does it all mean for the outlook for crude oil demand in China?
Much of the optimism over forecasts for strong growth in global oil demand this year are centred around a rebound in China, especially in the second half of the year as the world’s second-largest economy is expected to experience strong growth after ending its strict zero-COVID policy.
There is nothing inherently wrong with OPEC+’s forecast for global oil demand growth of 2.32 million bpd in 2023, or the 2 million bpd forecast from the International Energy Agency.
But what these forecasts don’t account for is that China’s oil importers and refiners are building up options as to what path they choose.
CHINA REFINERS HAVE OPTIONS
If OPEC+ are able to use output restrictions to keep crude prices above $80 a barrel for a sustained period, as seems to be their desired outcome, the question is how will Chinese refiners respond.
By building stockpiles now, they can reduce crude imports later in the year if they deem prices to be too high.
Most of the crude arriving in China in the first quarter of this year would have been arranged in the last quarter of 2022, when the benchmark Brent futures price dropped from just under $100 a barrel to as low as around $76.
The price continued to track sideways at the start of this year, before dropping as low as $70.12 a barrel on March 20, a decline that prompted OPEC+ to cut another 1.16 million bpd of output from May onwards.
This move pushed Brent contracts back above $80 a barrel, a level they have maintained, closing at $83.12 on Wednesday.
It’s likely that Chinese refiners view the current price as too high given the soft global economic outlook, which in turn will lead them to first seek the cheapest grades available, such as discounted Russian cargoes.
But if the price of crude remains elevated, China’s refiners will have the option to import less and use up stockpiles, or reduce the current high volume of exports of refined products.
China’s exports of refined products soared 59.8% in the first quarter to 18.2 million tonnes, which works out to about 1.62 million bpd if the BP Plc conversion factor of 8 barrels of product per tonne is applied.
Exports of refined products jumped by 610,000 bpd in the first quarter from the same period last year, while imports of crude increased by about 700,000 bpd.
This means that China’s domestic consumption actually was soft in the first quarter, especially in light of the ongoing flows into inventories.
The risk is that the oil market focuses on the data showing strong Chinese crude imports and refinery throughput, but ignores the other side of the equation of still robust inventory builds and surging fuel exports.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Jamie Freed
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
