China’s crude oil imports for June raise more questions than answers
As growing numbers of smaller refineries start to disrupt a sector traditionally dominated by SOEs
China’s crude oil import figures for June have raised more questions than answers. Growth in overall apparent demand and actual import figures is diverging, leading analysts to wonder where all the oil is going.
“There is a bone of contention in Chinese oil import figures,” said Laban Yu, equity analyst at investment bank Jefferies. “If you track the overall demand by adding up the products being produced in China from crude oil imports, you get an increase in demand of 1.5 per cent year to date. However, if you add up all the actual amount of oil imported into China so far this year, total demand should be up 7.4 per cent year to date.”
In a normal year the two figures would roughly match, and Yu said that analysts would attribute the difference between the two to the net change in China’s strategic oil reserves.
China considers its strategic oil reserves to be a state secret, though it is understood that it is increasing its capacity for oil storage at present. According to a report from Citigroup, a 11.3 million barrel commercial storage facility in Hainan may have come online in May.
Yu said it seems unlikely that the difference between China’s oil imports and apparent demand can be explained by expanding reserves alone. “This would mean that China would have roughly doubled the reserves it built up in the last decade in just eight months,” he said. “Underreporting of refinery throughput seems likely to lie behind at least some of the difference.”
Oil refining was traditionally the sole domain of China’s state owned enterprises, but while it remains dominated by giants such as Sinopec and PetroChina, in the past 12 months the country’s National
Development and Reform Commission has issued licences to a number of smaller, privately owned refineries, known as “teapots”.
Citigroup estimates that in the first four months of this year crude oil imports to these refineries stood at 15 per cent of China’s total.
Data released from China’s General Administration of Customs last week showed that in June China imported 30.62 million tonnes of crude oil, an increase of 3.8 per cent year on year, but a decline of 5 per cent from May.
The month-on-month decline appears to be because a number of refineries, in both the state sector and among the teapots, are currently undergoing maintenance. About 700,000 to 800,000 barrels per day of capacity were shut down in June for this reason, according to estimates from Thomson Reuters supply chain and commodities research.
However, the year-on-year growth remains striking. “Crude oil imports into China this year have been significantly stronger than we originally expected, largely because of the volume of crude being purchased by independent refiners earlier in the year when flat [absolute] prices of oil were relatively lower,” said Song Yenling China, oil analytics senior analyst at Platts. “The incremental volume of crude imported year to date this year is an average of 900,000 barrels a day versus about 1 million barrels a day in 2014 and 2015 combined. It is likely that three-quarters of the increase this year is due to all the buying by independent refiners.”
Both Yu and Song suggest that the purchasing of oil by the teapot refineries may explain the difference between apparent demand and the amount of oil either imported into China or produced domestically.
“One possible explanation may be under reporting of domestic output by the independent refineries to the government, i.e., refinery runs are actually higher than reported, which would mean that actual domestic consumption should be higher,” Song said. “For example, NBS statistics suggest a 300,000 barrels a day increase in total refinery runs this year across China, but independent refiners in Shandong have likely increased processing by more than that.”
Chinese imports of other commodities, for example coal, iron ore and copper, have been slowing this year, reflecting declining investment in heavy industry and infrastructure.
Jeffries’ Yu suggests that one reason why oil imports have stayed high is because of China’s changing economy. “Oil is required for investment in infrastructure, but also for the petrol required by the still growing numbers of drivers on China’s roads,” he said.