The world’s largest oil importer, China, will continue to have a significant impact on the oil market in the coming months, as most of the rest of the world continues to battle a second coronavirus wave that has stalled the already fragile global oil demand recovery.
China is likely importing now the last of the cheap crude its refiners snapped up in the spring when it took advantage of the lowest crude oil prices in nearly two decades.
With the last of the delayed cargoes likely to discharge and clear customs in October, the market now looks with apprehension at signs about China’s oil-importing policies for the rest of the year, seeking signs of how much the ‘normal levels’ of crude imports could be.
That’s one of the known unknowns for the oil market and oil prices going forward, alongside some volatility in prices around the U.S. presidential election in two weeks.
China’s crude oil imports were strong in Q2 and Q3 this year, while the rest of the world went through a fragile demand recovery only to see it flatten at the end of the summer as COVID-19 infections started to rise again in major oil consumers, including in the United States, Europe, and Asia excluding China.
Customs import data from the world’s top oil importer continue to show strong arrivals of crude as ports and customs continue to process cargoes that have waited for weeks to discharge. But as the remainder of the backlogged cargoes clears customs this month, Chinese oil imports for the rest of the year are expected to drop off the high volumes seen between April and September, analysts say.
Falling Chinese imports compared to Q2 and Q3 will not be unexpected, considering that oil prices are now double the level of around $20 a barrel in April. The question for the market and analysts now is how much China’s normalized import rates will be after the buying binge earlier this year.
Much lower Q4 import volumes than in the previous two quarters will send a negative signal to the market at a time when economic recovery and, by extension, oil demand recovery elsewhere is weaker than in the summer and weaker than everyone had predicted three months ago.
Over the past five months through September, China’s crude oil imports haven’t fallen below 11 million barrels per day (bpd), with June arrivals of 12.9 million bpd smashing the previous record from May by more than 1.5 million bpd.
In September, China likely increased its crude stockpiling compared to August, according to estimates from Reuters columnist Clyde Russell, based on official data for oil imports plus domestic production, less refinery processing rates. China probably sent around 1.75 million bpd into storage last month, up from 1.1 million bpd in August.
China’s rate of stockpiling crude oil this year has been much higher than in 2019 due to the ultra-low prices in the spring, expansion of storage sites, and the policy to ensure energy security. It’s likely, therefore, that Chinese refiners have a lot of crude around and may opt to process part of the oil stashed in recent months than keeping purchases very high. Fuel demand in the rest of Asia is still sluggish, which couldn’t be much of an incentive for Chinese refiners to process high volumes of crude into fuel for exports.
China’s crude oil imports in Q4 could drop by between 1.2 million bpd and 1.7 million bpd compared to Q3 import levels, analysts told Reuters last week.
A large decline in China’s crude oil imports is the last thing oil bulls (and OPEC) need in the last quarter of the year, while fears of stalled demand are front and center together with rising supply from Libya and recovering drilling activity in the United States.