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China’s Oil Demand Could Rebound Sooner Than Expected

Tsvetana Paraskova

China’s fuel demand has materially weakened after the coronavirus outbreak forced authorities to lock down cities and discourage travels.

Some estimates put the current demand loss in China at around 4 million barrels per day (bpd) of fuel.  

Still, China’s crude oil imports are expected to have held up pretty well in February, slowing by just around 160,000 bpd compared to January import levels, according to Reuters columnist Clyde Russell who cites estimates from Refinitiv Oil Research.

Crude oil imports into the world’s top oil importer and key growth driver would be weaker in March than in February, because most of the February volumes had been contracted, set, and en route to China when the coronavirus outbreak put the brakes on fuel demand in the country.

March could be the month with the lowest Chinese crude imports this year, also because some refiners typically schedule maintenance between the winter and summer fuel seasons.

China’s top oil supplier and the world’s largest oil exporter, Saudi Arabia, is said to be cutting its crude exports to the world’s top oil importer by at least 500,000 bpd in March because of a slump in refinery demand amid the coronavirus outbreak.

Several factors point to materially lower Chinese crude oil imports in March, but a couple of other reasons also suggest that China’s crude imports will not fall off a cliff.

True, the demand loss is considerable, to the point of having all organizations and analysts, including the IEA, the EIA, and OPEC, slash their oil demand growth forecasts for 2020 by between 230,000 bpd and 400,000 bpd and now expecting this year’s global demand growth at 1 million bpd or less.

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Before the coronavirus outbreak, all estimates pointed to demand growth picking up pace this year, thanks to the phase one U.S.-China trade deal and brighter prospects for the global economy.

With the coronavirus on the verge of becoming pandemic, analysts are cutting economic growth outlooks and the markets fear a significant hit to economies as the outbreak now spreads faster outside China than within China.

If China effectively contains the coronavirus in March and authorities loosen their stimulus purse strings to help the economy, fuel demand could begin to recover as early as in April.

The weakest month of China’s crude oil imports this year could be in March because refineries have slashed fuel production amid depressed domestic demand for fuels. The coronavirus came at a time in which fuel stocks were high in China in preparation of the Chinese New Year at the end of January and the beginning of February, when people typically travel a lot. The outbreak imposed strict travel restrictions and travel continues to be discouraged, so China found itself in an oversupply of fuels, which it now exports to neighboring Asian countries, flooding the already weak Asian market with more refined oil products.

Travel bans and lower economic activity cost China 4 million bpd of lost demand at the moment, Vitol’s chief executive Russell Hardy said last week.

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This demand loss, however, doesn’t mean that China will be slashing crude oil imports by as much.  

In fact, the world’s top oil importer has two very solid reasons not to slack off imports too much—oil prices trading this week at their lowest in more than a year, which could encourage opportunistic buying by refiners to stock up for later this year and for the state to fill in its strategic petroleum reserves with the cheapest crude in 14 months.

The unknowns in these assumptions are how much storage capacity refiners and China have to potentially take advantage of the low crude oil prices. Because of the opaque nature of China’s reporting of inventories, no one is really certain how much crude oil China could stock up if it doesn’t plan to process it immediately.

China is the world’s top oil demand growth driver and if it manages to soon contain the coronavirus outbreak and stimulate the economy, crude oil imports could begin rising again when March ends.

By Tsvetana Paraskova for Oilprice.com

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