China managed to add a small volume of crude oil to inventories in July, as weak refinery processing outweighed a sharp drop in imports.
China’s surplus crude for July amounted to 210,000 barrels per day (bpd) and came after the world’s biggest oil importer drew on stockpiles in both May and June amid supply constraints caused by the Iran conflict.
The return to a surplus in China’s crude availability in July comes as a surprise given the huge decline in imports, with seaborne arrivals of oil down more than 3 million bpd from levels prior to the conflict.
This had seen China’s refiners draw on stockpiles by about 940,000 bpd in June and 500,000 bpd in May.
China does not disclose the volumes of crude flowing into or out of its strategic and commercial stockpiles, but an estimate can be made by deducting the amount of oil processed from the total crude available from imports and domestic output.
On this basis, crude oil imports of 8.41 million bpd and domestic output of 4.3 million bpd mean refiners had a total of 12.72 million bpd available.
China’s refiners processed 12.51 million bpd in July, according to official data released on Monday, down 15.8% from the same month last year and only marginally above the 12.47 million bpd from June. Subtracting the July throughput from the total crude available leaves a surplus of about 210,000 bpd available for storage.
For the first seven months of the year China has added about 480,000 bpd to stockpiles after strong imports in the first quarter boosted the surplus of available crude.
What the numbers show is that China has not really had to tap its vast oil inventories, estimated to contain at least 1.2 billion barrels, despite dramatically cutting its crude imports since the start of the Iran war.
Since the United States and Israel attacked Iran on February 28 shipments of crude and refined products through the Strait of Hormuz have been constrained as Iran attacked vessels, partly as retaliation but also to gain leverage for any eventual peace settlement.
Just under 20% of the world’s crude oil passed through the narrow waterway prior to the war, and while the volumes getting through now are disputed, even the most optimistic figures from the U.S. government still point to a current loss of about 5 million bpd from the Middle East from pre-conflict levels.
CHINA ADJUSTS
China’s imports of 8.41 million bpd in July were up from the decade-low of 7.12 million in June, but were still more than 3 million bpd below pre-war levels.
To compensate for the lower imports, China has cut refinery processing rates, but they are still at levels sufficient to meet domestic demand.
China has instead cut exports of refined products, with shipments of 4.65 million metric tons in July being only marginally higher than the 4.36 million tons in June. For the first seven months of the year fuel exports dropped 13.1% to 28.25 million metric tons, according to customs data.
Beijing placed restrictions on fuel exports shortly after the start of the Iran war, a measure aimed at ensuring domestic supply, but also one that allowed China to dramatically cut crude imports without dipping too far into stockpiles.
Beijing is easing restrictions on fuel exports for a second month in August, a move that will allow refiners to capture the elevated margins in Asia for diesel and gasoline.
However, allowing more fuel exports does lead to the question as to whether China will seek to lift crude imports, a move that may lead to higher prices given the ongoing supply disruptions from the Middle East.
China’s seaborne crude imports are estimated at 7.0 million bpd in August by commodity analysts Kpler, slightly higher than the 6.98 million recorded for July.
It’s likely that the August figure will be revised higher as more cargoes are assessed, but it is still certain to be well below the average of 11.52 million bpd for seaborne arrivals in the three months to end February.
This means that for August China is continuing to act as the main force absorbing the restricted crude supply from the Middle East.
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The views expressed here are those of the author, a columnist for Reuters.
(Editing by David Holmes)