China Storage Logisitics Will Impact Crude Imports

The state of China's oil storage tanks is shaping up as a key determinant of the likely path of imports by Asia's largest fuel consumer.

It's widely accepted in the oil market that China is importing more crude than it actually uses, or re-exports as refined products, and that the extra is flowing into both strategic and commercial storage sites.

What is less known is how much capacity is left in these tanks, when they are likely to be full and the rate at which new facilities are being built.

A trading executive at top Chinese refiner Sinopec weighed into the issue on March 25, saying China's commercial and strategic storage is almost full.

Perhaps showing how sensitive the issue is, the executive requested not to be named despite speaking to reporters at an industry event.

If the Sinopec official is correct, it almost certainly will lead to slower growth in China's crude imports, thus putting downward pressure on global prices given China's status as one of the few centres of significant demand growth.

The problem is that there is a fair degree of scepticism over whether China's storage tanks are indeed full.

It is believed that some of the capacity due to come available in the second half of last year has been delayed, probably to the second half of this year.

Storage with a nameplate capacity of 132 million barrels was delayed until at least the second half of this year, according to Thomson Reuters Oil Research and Forecasts.

This would imply there is scope for oil imports to remain strong in the second half of this year as these storage tanks become available.

It is also fairly clear that some oil has been finding its way to storage tanks this year, with imports and domestic oil output exceeding the amount of crude processed by refiners.

Crude imports averaged 6.62 million barrels per day (bpd) in the first two months of the year, while domestic output was 4.22 million bpd, giving a combined total of 10.84 million bpd of oil available for refining.

However, only 10.22 million bpd was refined in January and February, leaving 620,000 bpd that likely went into storage.

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Refiners have been boosting commercial stocks in line with a government requirement that they increase inventories to 15 days of average throughput by the beginning of next year.

This does help explain some of the surplus crude coming in during the first two months, but again, questions have to be asked as to whether this can continue at the pace it has been going at so far this year.

The answer for March is that it likely did, with Thomson Reuters Oil Research and Forecasts estimating China will have imported 28 million-29 million tonnes of crude in March or about 6.59 million-6.82 million bpd.

This can be confirmed only when the preliminary data for China's March imports is released next week.

Another factor worth considering is how much of China's crude imports are being re-exported as refined products, particularly diesel and gasoline.

The first two months of 2015 have seen fairly significant reductions in exports of the two main fuels, with diesel shipments dropping to about 23,100 bpd from 89,900 bpd in the first two months of last year, and gasoline declining to 76,800 bpd from 98,900 bpd.

While positive for the margins of Asian refiners outside of China, the lower fuel exports raise the risk that these will be ramped up in coming months, especially if diesel demand growth remains soft in China.

The picture that emerges overall is that large volumes of crude are still apparently flowing into storage in China, but there is uncertainty as to whether this will continue, or will taper away towards the middle of the year before resuming as new tanks are completed.

By Clyde Russell