The sharp slowdown in China’s refinery processing in July may be another warning sign that the robust growth in crude oil demand this year in the world’s top importer is poised to moderate.
Refinery throughput was 45.5 million tonnes of crude in July, or about 10.71 million barrels per day (bpd), the lowest operating rate since September last year, and a drop of 500,000 bpd from June.
For the first seven months of the year, refinery runs were 11.04 million bpd, up 2.9 percent from the same period last year.
While this is still a reasonable year-on-year growth rate, it does contrast with the strong 13.6 percent increase in imports of crude in the first seven months of this year, compared to the same period in 2016.
While imports have been rising partly to offset lower domestic crude output, the larger share of the additional overseas purchases has been flowing to inventories, both commercial ones held by refiners and strategic.
It’s this inventory flow that has been behind the strong increase in China’s crude imports, but there are signs this source of growth may moderate in the second half.
China doesn’t regularly report flows into strategic storage, but commercial crude inventories rose to a nine-month high of 30.57 million tonnes, or about 223 million barrels, in June, according to Reuters calculations based on percentage changes provided by the official Xinhua news agency and historical data.
The amount of crude available for storage can be estimated by adding together domestic output and imports and then subtracting refinery throughput.
Imports in the first seven months of the year were 8.57 million bpd and domestic output was 3.88 million bpd, giving a combined total of 12.45 million bpd.
Subtracting refinery runs of 11.04 million bpd leaves a surplus of 1.41 million bpd.
Not all of this will have flowed into strategic storage, especially as smaller, independent refiners have been building up their stockpiles as more of them were granted import permits, allowing them to purchase crude.
China is about 46 percent of the way to meeting its target of strategic stockpiles equivalent to 90 days of imports, according to calculations by Thomson Reuters Oil Research and Forecasts.
This means importing crude for stockpiling is likely to continue for several years.
However, a question mark has to be placed over whether the smaller refiners will continue to import at the pace seen so far this year, especially since many may have used up most of their official quotas for the year.
No new applications for import quotas have been accepted since May, according to Thomson Reuters Oil Research, making it likely that overseas purchases by the smaller refiners may slow in the second half of the year.
A glut of refined products in the domestic market has led to price-cutting for fuels as the state-owned majors attempt to defend market share against the independent refiners.
This is likely to concern the authorities in Beijing, and official pressure may also limit the amount of crude being imported.
The economic case for higher fuel demand also took a hit this week, with data showing industrial output, investment and retail sales all expanding at rates below the market consensus.
Ample commercial stocks, a glut of refined products and rising retail competition driving fuel prices to lower all make it likely that growth in China’s crude imports may moderate in coming months.
Add to this efforts to restrict supplies by the Organization of the Petroleum Exporting Countries and allied producers and the stage is set for a loss of momentum in China’s crude imports.
As always, the jokers in the pack are how much crude will China buy for its strategic stockpiles, and how much can its refiners export back into the market as refined products.
The opinions expressed here are those of the author, a columnist for Reuters.
Clyde Russel, Editing: Christian Schmollinger – Reuters