China’s crude oil imports jumped to a record high in May, while refinery throughput increased to near-peak levels, suggesting a strong recovery in oil demand after the coronavirus outbreak.
Indeed, recovery is there, but it is not the sole reason why China – through relatively strong crude oil imports even during the lockdown – helped the otherwise weak global oil demand when other countries went on lockdown in March and April.
Oil demand in China is rebounding, but it may be softer than what headline figures suggest because China stepped up its crude oil stockpiling this year and boosted exports of refined oil products, Reuters columnist Clyde Russell notes.
Regardless of the reasons for China’s seemingly insatiable appetite for crude oil, one question looms over the market—how long will China keep up oil imports that generally support global oil demand recovery, which is still fragile elsewhere.
Last month, China imported a record-high 11.34 million bpd of crude oil. While part of the record imports was driven by economic activity picking up, the other driver was April’s meager oil prices, which incentivized China’s crude oil stockpiling in strategic and commercial inventories.
According to calculations by Reuters’ columnist Russell, China hoarded crude oil at a rate of 1.88 million bpd between January and May, up by around 670,000 bpd from the 2019 estimated fill rate of 1.21 million bpd.
Since China does not report inventories, analysts are trying to guesstimate how much crude it is directing to storage based on data of imports plus domestic production, minus refinery throughputs.
Estimates from IHS Markit show that China’s crude oil inventories will have jumped by 440 million barrels in the first half this year—the largest six-month increase in inventories anywhere in the world, ever.
China’s “big fill” dwarfs the largest ever six-month jump in U.S. crude inventories—between late 2014 and early 2015, when stocks increased 111 million barrels. The U.S. inventory jump would be just 25 percent the size of the inventory build currently underway in China, IHS Markit said in a note this week.
“China’s crude oil buying and stock building have been a critical support for an otherwise exceptionally weak crude oil market. It is part of the reason for the increase in crude oil prices that have occurred since late April,” said Xiaonan Feng, research analyst, IHS Markit.
Because of China’s opaque – or merely non-existent – reporting on storage availability and inventories, no one knows how much longer China could keep up its record filling rates if it chose to do so.
At the same time, refinery throughput in May hit its fourth-highest per barrel rate ever, according to Reuters estimates based on official statistics figures. Independent refiners—the so-called teapots—had crude processing rates close to the levels from before the coronavirus crisis, suggesting that demand is returning to normal.
But China’s exports of refined petroleum products were up in the first five months—by 10.4 percent to 1.57 million bpd, despite a slump in May, due to weak fuel demand in other Asian countries.
Rising fuel exports and increased stockpiling, thanks to ultra-cheap crude prices in April, may be a sign that China’s actual fuel demand could be softer than the imports and refinery run numbers suggest, according to Reuters’ Russell.
China’s economic activity also improved in May compared to April, with electricity consumption in the industry – a proxy gauge for economic activity – rising by 7.1 percent, Chinese Xinhua news agency reported this week.
According to official Chinese economic data cited by Caixin Global, the recovery in China continued in May, but at a slower pace than analysts had expected.
Going forward, China’s economy faces the challenge of weak demand for its exports, while fears of a new wave of virus infections have intensified in recent days. Beijing put neighborhoods on lockdown this week in an attempt to contain a new “extremely severe” outbreak in the capital.
China has been stocking up on cheap crude in recent weeks, but if its domestic fuel demand recovery falters, it may not be able to support global demand recovery and oil prices for much longer, especially if fears of a second wave of COVID-19 were to materialize.