(Bloomberg Opinion) -- China can’t get enough of the world’s crude oil. The only problem is, what to do with it?
Saudi Arabian Oil Co., or Saudi Aramco, sharply raised prices for Asian shipments on Tuesday, lifting its premium on Arab Light crude by 50 cents to $1.20 a barrel above the Oman-Dubai benchmark. That’s a dramatically steeper increase than the 15 cents to 35 cents expected by traders, and it’s being driven by a bottomless thirst from Chinese refiners.
China’s imports of crude have been surging since 2015, when Beijing started allowing its “teapot” refineries — small-scale independent operations that are mostly based in Shandong province — to buy from abroad.
Teapots can largely explain the 50 percent growth of inbound shipments since 2014. If you subtract their import quotas from China’s total crude imports, it looks like state-owned PetroChina Ltd., China Petroleum & Chemical Co. and Cnooc Ltd. have been unloading more or less the same 300 million-odd annual metric tons all along.
What are all these barrels being used for? After all, diesel and fuel oil (the heavier fractions that make up the larger share of teapots’ output) have seen declining demand in China for years. Apparent diesel consumption in 2018 was running at its lowest levels since 2009, according to data compiled by Bloomberg, largely because of a decline in heavy industry. Even gasoline, which almost caught up with diesel last year as the largest segment of domestic demand, has been struggling in the face of fuel-efficiency regulations and slumping auto sales; PetroChina expects demand to peak in 2025.
The answer comes when you look outside China. The teapots’ increased production has mostly been trapped in the domestic market by stringent export quotas, but that’s allowed the state giants to sell displaced barrels from their own refineries on global markets. Exports of refined products — in particular, diesel going to Hong Kong, Singapore, the Philippines, Australia and South Korea — have jumped pretty much in line with the import surge.
This glut is likely to get markedly worse this year. Some 890,000 barrels a day of new refining capacity is due to open, according to Bloomberg Intelligence analyst Lu Wang, with another 1.08 million barrels coming online in 2020 and 1.12 million barrels in 2021. With China’s government setting a reduced economic growth target of 6 percent to 6.5 percent, it’s hard to see domestic demand soaking up all that fresh capacity. Meanwhile, export quotas granted to major oil companies are already up 13 percent from a year earlier, and may rise further.
Aramco’s bullishness on prices suggests that Chinese refiners’ dependence on exports isn't likely to weaken demand overall. Indeed, Oman crude oil has been trading at a sustained premium to Brent for the first time in almost four years, suggesting plenty of appetite for the overwhelmingly Asian-bound cargoes from the Arab state.
Gasoline on Nymex is the best-performing commodity so far this year, but that’s going to be cold comfort for refiners in the region that will have to deal with China exporting a domestic demand glut while it restructures a sub-scale refining industry. Asian plants processing Arab Light crude saw their weakest margins in four years in December. The flood of new product coming out of China this year will only add to the strain.
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David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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