China Added Crude to Inventories in July Despite Sharp Import Decline

China added about 210,000 barrels per day (bpd) of crude oil to inventories in July as weak refinery processing outweighed a sharp drop in imports amid supply constraints linked to the Iran conflict.

China’s surplus crude availability in July came as a surprise given the huge decline in imports. Seaborne arrivals were down more than 3 million bpd from levels before the conflict.

China’s refiners had drawn 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. However, an estimate can be made by deducting the amount of oil processed from the total crude available from imports and domestic output.

How China Added Crude to Inventories

China’s crude oil imports of 8.41 million bpd and domestic output of 4.3 million bpd gave refiners 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. That was down 15.8% from the same month last year and only marginally above the 12.47 million bpd processed in June.

Subtracting July refinery throughput from total crude available leaves a surplus of about 210,000 bpd available for storage.

For the first seven months of the year, China added about 480,000 bpd to stockpiles after strong imports in the first quarter boosted the surplus of available crude.

China Avoided a Major Draw on Oil Stocks

The figures show that China has not really had to tap its vast oil inventories, estimated to contain at least 1.2 billion barrels, despite dramatically cutting 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 in retaliation and partly to gain leverage for any eventual peace settlement.

Just under 20% of the world’s crude oil passed through the narrow waterway before the war. While current volumes are disputed, even the most optimistic figures from the U.S. government point to a current loss of about 5 million bpd from the Middle East compared with pre-conflict levels.

China Adjusted Refinery Processing and Fuel Exports

China’s imports of 8.41 million bpd in July were up from the decade-low of 7.12 million bpd in June, but remained more than 3 million bpd below pre-war levels.

To compensate for lower imports, China cut refinery processing rates. Those rates remained sufficient to meet domestic demand.

China instead cut exports of refined products. Shipments of 4.65 million metric tons in July were only marginally higher than the 4.36 million tons recorded 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.

What Happens to China’s Crude Imports Next?

Beijing placed restrictions on fuel exports shortly after the start of the Iran war. The measure was aimed at ensuring domestic supply and also allowed China to cut crude imports without drawing too heavily on stockpiles.

Beijing is easing restrictions on fuel exports for a second month in August, allowing refiners to capture elevated margins in Asia for diesel and gasoline.

However, increased fuel exports raise the question of whether China will seek to lift crude imports. Such a move 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 bpd recorded in July.

The August figure is likely to be revised higher as more cargoes are assessed, but it is still certain to remain well below the average of 11.52 million bpd for seaborne arrivals in the three months to the end of February.

This means that in August China is continuing to act as the main force absorbing restricted crude supply from the Middle East.

Courtesy: www.reuters.com