Is it a pause, or something more profound? Either way, China’s crude purchases are stuttering, helping to put the oil price rally on hold. At least for now.
While the world’s biggest importer took delivery of record amounts of crude in June, traders from Geneva to Houston to Singapore report that the country’s buying interest has cooled notably in recent weeks, taking away a key support for a strengthening global market for crude.
To be clear, nobody is saying that China’s rapid recovery in underlying oil demand is hitting reverse gear, but a huge wave of purchasing in that foreshadowed the June imports had two effects. First, it swelled inventories and eased the pressure to buy now. Second, it resulted in a huge backlog of vessels waiting to unload: a logistical constraint that some traders say is curbing buying now.
“This could put pressure on oil prices in the upcoming months,” said Carsten Fritsch, an analyst at Commerzbank AG. “The pace of Chinese crude buying was unsustainable. Either domestic demand is extraordinarily strong or inventories are rising massively. Be prepared for lower figures in the upcoming months.”
Physical crude cargoes trade at premiums or discounts to regional benchmarks. When oil refineries have an urgent need for crude, real barrels command bigger premiums or smaller discounts.
That’s what had been happening until recently, especially for so-called medium density, sulfur-laced crudes that are typical of Saudi Arabia, Russia and other producer countries in an Organization of Petroleum Exporting Countries-led alliance to curb global output.
While a shortfall in supplies of those barrels is still being felt acutely by the world’s refineries -- meaning there’s plenty of support for prices where they are now -- the drop in Chinese buying interest nevertheless removes a bullish factor.
Still, while some purchases by China’s price-sensitive independent refiners -- so called teapots -- have slowed, those of giant national oil companies like Sinopec have been stable.
Beijing has also given the teapots license to import more crude later this year, and the companies usually like to use those permits fully, fearful that if they don’t, they could suffer cuts the following year. So there’s a chance that the teapots would return to the spot market in force from September.
Based on tanker tracking and customs data from 27 producer countries, exporters loaded about 2.55 million barrels a day, or 22%, less crude for China last month than they did in May. The diminished June flow is likely to show up in July and August imports data, and traders say buying has remained subdued into this month.
The Asian country bought a record 19.1 million barrels of Russia’s flagship Urals crude cargoes for April loading. The voyage from Russia’s Baltic Sea ports, from where most of the shipments left, takes about 40-50 days, meaning much of the April-loaded oil would have arrived in China last month.
China’s plants subsequently cut their purchases sharply after a surge in prices. On top of the rally in outright prices of crude, Urals itself traded at record premium of $1.80 a barrel to its benchmark in northwest Europe on July 2, compared with $4.60 discount in late March. Only about 5.1 million barrels of Urals were shipped to China in May, and 2.2 million barrels in June, something that traders attributed to higher prices. The volume is expected to stay low in July, partly due to a deep cut in Russian exports.
$40 a Barrel
China has become “a built-in stabilizer” for physical oil markets, according to Paul Horsnell, head of commodities research at Standard Chartered. The nation’s heightened buying “tends to make demand look stronger at really lower prices and the reverse at higher prices,” he said.
Chinese demand for U.S. crude appears to have eased too. West Texas Intermediate crude for loading in Houston is now trading at around $1.25 a barrel above Nymex oil futures contracts. Back in April, when China picked up purchases spurred by low global oil prices, it fetched a $4 a barrel premium. Chinese interest in West African, Azeri and North Sea oil has also recently dipped from high levels, according to traders of those grades.
China’s earlier buying binge has resulted in massive port congestion as deliveries have been arriving steadily in recent months, adding to wait times for discharging and putting the brakes on new purchases, according to traders.
Another key reason for the loss of appetite for imports is a cap on prices that the Chinese governments will guarantee for fuels that refineries make -- equating to about $40 a barrel crude. Brent futures traded at about $43.50 a barrel on at 12:59 p.m. in London.
“Now that Brent is at $40 the incentive for large imports will likely diminish,” Morgan Stanley analysts analysts Martijn Rats and Amy Sergeant wrote in a note. “Over the last few months, when crude oil prices were low, China’s oil imports have risen to unusually high levels.”
(Updates with oil price in penultimate paragraph.)
For more articles like this, please visit us at bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2020 Bloomberg L.P.