As the coronavirus epidemic brought the world’s second-largest economy to a near-halt during the early part of the year, Chinese crude importers engaged in a massive buying spree, but now the Chinese bounty appears to be evaporating, and the bulls have been put on high alert by the weakening of a key oil price catalyst.
In May, China's crude imports soared to an all-time high, with imports clocking in at 47.97 million tons, or 11.34 million barrels a day, according to Bloomberg.
The furious buying by the world’s largest crude importer was a key reason why oil prices were able to stage a quick come back from their historic lows in April.
But after two consecutive months of heightened purchases, Chinese imports of crude oil slowed quite dramatically in the month of June, with traders from Houston to Geneva to Singapore reporting that the country’s appetite for crude had cooled considerably in recent weeks. Customs data from 27 producer countries shows that exporters loaded ~2.55 million barrels a day, or 22%, less of crude headed for China during the month of May.
There’s a method to the madness though (hint: the second wave of Covid-19 is not to blame).
The export slump could be taken to mean either of two things: China’s oil demand is hitting reverse gear once again, maybe due to the so-called second wave of Covid-19, or the pace of crude buying was unsustainable and is now reverting to the mean.
Luckily for the bulls, the second option appears to be a more valid reason for the unfolding scenario.
China’s price-sensitive independent refiners--aka the teapots--took advantage of the oil price crash in April to stock up on cheap crude and cut their purchases sharply after crude prices rebounded. China imported a record 19.1 million barrels of Russia’s Urals for April loading. The journey from Russia’s Baltic Sea ports takes about 40-50 days, meaning much of the April-loaded oil would have arrived at Chinese ports in June.
What some traders are latching onto is the hope that China’s teapot refineries are still hungry--desperately so--for crude imports, if only to hold on to their government licenses to import at a certain quota.
Further noted by traders is the fact that imports by the Chinese giants--China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC), and China Petroleum & Chemical Corporation (Sinopec)--didn’t miss a beat.
This in turn means that imports are likely to remain lackluster in July and July and probably recover in September. This optimism, however, fails to account for the fact that the teapots make up over one-fifth of Chinese crude processing capacity.
But there’s another problem on the horizon for teapots in particular, if not for global traders: China is gearing up to build a mega refinery (400,000 barrel-per-day) in Shandong. That refinery is slated to come online in 2024, and it would render a lot of teapots irrelevant.
Regarding demand being wrecked by the pandemic, China has been successful at dealing with its second Covid-19 wave, quickly bringing the situation under control in a matter of weeks and has remained relatively stable for at least a month now.
Unfortunately, the same cannot be said for the giant North American markets.
Global Demand Still Recovering
You can expect to see more of this kind of trader-driven ebb and flow from the Chinese market in the future.
Despite a slump in demand by a key customer, the price of Urals has held up pretty well. Russia’s flagship brand as well as Saudi and OPEC crude have been enjoying much better pricing power as we explained here thanks to the deep production cuts.
Overall, global oil prices appear to have consolidated ~$40/barrel and are likely to remain range-bound until another big catalyst emerges (Covid-19 vaccine, anyone?)
In the meantime, it’s worth keeping an eye on China’s yuan-denominated crude-oil futures, launched in March 2018, because global interest is gathering--even if slowly. Challenges remain to this becoming a global benchmark, but it’s clearly headed in that direction.
Global interest has increased because of fairly stable Chinese oil prices this year thanks to price controls that allowed it to slide through the oil price war that saw prices go negative for WTI in April, according to the Wall Street Journal.
In 2018, there were only 45 international brokers offering up Chinese yuan-denominated oil futures. Now, there are 60, says WSJ, and they include JPMorgan and Goldman Sachs.
Further, for the first time, it’s profitable for traders to deliver this contract. Industry sources told Reuters on Tuesday that BP has now officially become the first major global firms to deliver oil to the Shanghai contract in July. BP reportedly delivered 3 million barrels of Iraqi oil to the contract, and is set to deliver another million barrels next month.
By Alex Kimani for Oilprice.com
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