China's Crude Splurge is OPEC's Best Friend
China's crude oil imports surged to the second-highest on record in September, but this isn't a sign of supercharged demand in the world's second-biggest economy.
It's rather a shuffling of where oil is being stored around the globe and a couple of factors that caused a temporary boost to Chinese import demand.
China's crude imports jumped to 37 million tonnes in September, equivalent to 9 million barrels per day (bpd), according to preliminary customs data released on Oct. 13.
This was up from August's 8 million bpd, but it's worth noting that August was an eight-month low. More importantly, China's oil imports are up 12.2 percent in the first nine months of 2017 from the same period last year.
This certainly looks like solid growth in the world's biggest crude importer, and indeed, demand for refined fuels had been higher than expected at the start of the year, mainly on the back of strength in infrastructure and construction.
But it also appears that China is buying substantial amounts of crude for its strategic and commercial storages.
The September figure was likely boosted by the start-up of China National Offshore Oil Corp's new Huizhou refinery, with plants typically requiring around 21 days of commercial reserves to ensure smooth operations.
The return from maintenance of some of the independent refineries also likely boosted crude imports in September.
But it also appears that China's ongoing build-up of its strategic storage contributed to import demand.
China rarely releases data on its Strategic Petroleum Reserve (SPR), but Thomson Reuters Oil Research and Forecasts estimated that at least 1.15 million tonnes, or about 280,000 bpd, flowed into the SPR in September.
The International Energy Agency said on Oct. 12 that China has been building its crude stockpiles at a record pace in 2017, contributing to the country's expected demand growth of 540,000 bpd in 2017 from 2016.
The IEA does expect China's crude oil demand growth to slow to 325,000 bpd in 2018 as the country closes in on filling its available storage tanks.
While China's buying of crude for its SPR isn't a new dynamic, in the global oil market it effectively represents a shift of where oil is being stored.
STORED OIL FLOWS TO CHINA
As the global benchmark Brent crude moves into backwardation, where prices for oil for future delivery become cheaper than cargoes for immediate shipping, it becomes unprofitable for producers and traders to store crude.
This has resulted in stored oil being released onto the market, and China has shown it's a willing buyer.
In particular it appears that crude in floating storage in the Asian region has been moved to China.
While it may seem of limited consequence for oil simply to move from one place to another, it does matter for market dynamics.
Oil in China's SPR is effectively off the market, insofar as it's unlikely to be used or be available for sale, unless there is a crisis of some description.
However, oil stored in anchored tankers or in land-based facilities can be traded and shipped. In other words, it is dynamic and part of the global physical oil market.
It's these inventories that the Organization of the Petroleum Exporting Countries (OPEC) and its allies have been targeting in their efforts to re-balance the global market and boost the price of crude.
The overhang of crude acted as a drag on the price, and as oil moves out of storage it tightens the market, allowing OPEC and other producers to raise prices.
In some ways China's demand for oil for its SPR has been OPEC's biggest ally, but it should also be noted that China most likely has boosted oil imports precisely because the price has been relatively cheap.
Whether China would ease purchases for its SPR if crude prices rose strongly remains to be seen, but it certainly would be a possibility.
With Brent remaining below $60 a barrel despite the output curbs by OPEC and its allies, it's also likely that China will continue to fill its SPR.
This means the country's crude imports will likely remain robust in coming months, even if they slip back somewhat from September's elevated levels.
However lower quotas for the export of refined products may also hamper China's demand for imported crude in the fourth quarter, with refiners getting close to having used up their allocations for the year.
As usual there are competing dynamics at work in China's crude oil markets, but it is likely that good consumption growth in the domestic market and strong flows into storages will offset any loss of demand from slowing refined product exports.
By Clyde Russell
