LAUNCESTON, Australia, – One of the most salient features of the crude oil market since the onset of the coronavirus pandemic is the extraordinary amount stored by China.
But that stopped in October, at least temporarily.
A combination of record refinery processing and easing of import volumes, as the last cheap crude purchased during a brief price war in April was delivered, led to a low inventory draw in October.
China does not disclose the volumes of crude entering strategic and commercial inventories. But an estimate can be made by deducting the amount of crude processed from the total amount of crude available from imports and domestic production.
In October, Chinese refineries processed 59.82 million tonnes of crude, or 14.09 million barrels per day (b / d), narrowly beating the previous monthly record of 14.08 million b / d set in June.
Crude oil imports were 42.56 million tonnes, while domestic production was 16.41 million tonnes, totaling 58.97 million tonnes, or 13.89 million b / d.
Subtracting the available crude from the refinery throughput leaves a discrepancy of 200,000 b / d, suggesting that Chinese refiners drew this modest amount from storage tanks in October.
Although the implied inventory drawdown is small, it represents a dramatic reversal of the trend so far this year, especially in the middle of the two quarters of the year when crude bought during the April price war began. to arrive in Chinese ports.
In the first nine months of the year, around 1.83 million b / d went into inventory, with June’s 2.77 million b / d being the highest on record.
The massive volumes entering Chinese storage tanks have in some ways masked the true state of weak demand across the world, caused by lockdowns as many countries tried to stop the spread of the coronavirus pandemic.
The Chinese buying frenzy came amid a dispute between Saudi Arabia and Russia, the OPEC + group’s main exporters, which pushed benchmark Brent futures to their lowest in 17 years.
While the price war only lasted a few weeks before a new production deal was struck, it gave Chinese refiners an opportunity to stock up on cheap supplies – so much so that the crude flooded which resulted in queues of tankers that could wait several weeks. to unload in ports.
The latest cheap crude is expected to be unloaded this month, but it was already declining in October, with customs figures showing just 10.02 million bpd being unloaded, the lowest monthly total in six years.
The question for crude oil markets now is that China has received the last of cheap crudes, will it run out of stocks, continue to buy for storage, or just match imports to refining demand?
While the apparent small drop in inventories in October may suggest that Chinese refiners will deplete stored crude, it is far too early to say for sure that is the case.
In fact, it looks like crude imports will likely pick up in November. China will import around 11.3 million bpd this month, according to preliminary estimates from Refinitiv Oil Research.
The rebound is due to rising imports from Saudi Arabia, after the kingdom slashed its official selling prices, with Refinitiv estimating imports at 2.25 million bpd in November, up from 1.29 million bpd in October.
Another factor is the increase in imports from the United States: 1.07 million b / d is expected to be unloaded in November, up from 490,000 b / d in October.
Beijing may be trying to boost purchases of U.S. crude in an attempt to meet the terms of its so-called Phase 1 trade deal with Washington, which called for a dramatic increase in imports of U.S. crude, liquefied natural gas, and coal. .
Since the signing of the agreement in January, Chinese imports of US energy have fallen far short of the levels specified in the agreement. But Beijing may be trying to show that it is making an effort before defeated President Donald Trump exits and his successor, Joe Biden, is installed in January.