China set a fresh monthly crude oil import record in April and continues to import growing volumes of crude oil this year, accounting for an estimated two-thirds of global oil demand growth in 2019.
Yet, a rough estimate of actual Chinese oil consumption patterns lately suggest that the U.S.-China trade war has hit China’s industries and that nearly half of the rise in crude imports have gone into storage so far this year, according to Reuters columnist Clyde Russell, who offers an interesting perspective on whether China’s soaring crude oil imports adequately reflect what’s going on with the Chinese economy.
Signs are pointing to a slowdown in China’s economic growth, while stockpiling—at high levels so far this year—could decelerate later in 2019 if oil prices rise to a level Beijing considers too high to build inventories at the current pace.
China hit a new monthly record of 10.64 million bpd in crude oil imports in April this year, as refiners rushed to stock up with Iranian oil before the U.S. removed the sanction waivers. Then, China’s crude oil imports dropped in May from the monthly record in April, as Chinese refiners drastically reduced Iranian oil imports after the end of the U.S. waivers and as some state refineries were offline for planned maintenance.
The headline number of China’s crude oil imports suggests that first-half imports jumped by 8.8 percent from the same period last year, or by around 800,000 bpd, according to estimates from Reuters’ Russell.
This growth accounts for most of the world’s estimated oil demand growth for this year, which is currently pegged at 1.1 million bpd-1.2 million bpd by OPEC, the EIA, and the International Energy Agency (IEA).
However, China is thought to have accelerated putting crude into commercial or strategic storage, while it has also boosted refined oil product exports this year, which means it may have had much smaller growth in actual domestic oil demand.
Crude oil supply in China—including imports and domestic production—minus refinery runs, suggests that between January and May, China put 1.21 million bpd into either commercial or strategic storage, compared to 850,000 bpd put into storage in the same period last year, according to Russell’s calculations.
China doesn’t provide figures about storage, so this is only an estimate, but this estimate suggests that China accelerated stockpiling this year, with 45 percent of the crude import growth heading to storage.
Add to this increased exports of fuels, and China’s actual crude oil consumption growth may have been just 340,000 bpd in H1 2019, Russell argues.
Earlier this year, data compiled by Wells Fargo Securities showed that China’s diesel demand slumped by 14 percent in March and 19 percent in April, to the lowest levels in a decade.
“We believe the accelerating decline is most likely tied to economic factors and the effects of the tariff ‘war’ with the U.S.,” CNBC quoted Wells Fargo energy analyst Roger Read as saying in a note at the end of May.
Most recently, BlackRock, the world’s biggest asset management firm, said that Chinese economy is set for a “lull” due to the trade war that has become the single biggest driver of global economy and markets. According to BlackRock, investors are “overly optimistic” that China’s stimulus measures will be able to boost economic growth, South China Morning Post quoted the asset manager as saying.
“We believe China’s GDP should be able to avoid falling below the 6% target, but some industries, especially export-related ones will be hurt, and jobs and wages may not remain as stable even if GDP does,” Iris Pang, ING Economist, Greater China, said last week. Apart from wobbling economy, China’s crude oil demand, and possibly imports, could be dragged down in the short term by refiners curtailing refinery runs in the third quarter as massive refinery start-ups and slowing domestic fuel demand have created a fuel glut in the country, hurting refining margins.
According to JLC International, Sinopec ZRC will cut daily crude consumption by 2.17 percent, while Tianjin Petrochemical is set to reduce its daily crude runs by 5.12 percent in July.
So far this year China has shown resilient crude oil import growth. But actual industrial and manufacturing crude consumption may have been much lower than the headline number suggests. Going forward, if China reduces the rate of crude stockpiling if oil prices rise, its crude oil imports could flash a warning sign to the oil market that the world’s top oil importer is seeing significant slowdown in crude demand growth.