(Reuters) – China added to crude oil stockpiles at the fastest rate in nearly three years in May, as robust imports outweighed near-record refinery processing.
A total of 1.77 million barrels per day (bpd) was added to inventories in May, the most since July 2020 and reversing the small, and rare, draw of 340,000 bpd in April.
When assessing the state of China’s oil market, it’s common to focus on the level of imports and refinery throughput, and both have been strong in recent months.
This has stoked the bullish narrative that China’s re-opening from its now-abandoned zero-COVID policy will boost fuel consumption and make the world’s largest oil importer the major driver of global crude demand this year.
The question the market tends to pay less attention to is the third leg to China’s oil picture, namely flows into commercial or strategic storages.
While strong imports and refinery runs are undoubtedly bullish signals, it’s possible that large flows into inventories are a more medium to long-term bearish indicator, as stockpiles give Chinese refiners options should they deem prices are rising too high or too fast.
China doesn’t disclose the volumes of crude flowing into or out of strategic and commercial stockpiles, but an estimate can be made by deducting the amount of crude processed from the total of crude available from imports and domestic output.
China’s refiners processed 62.0 million metric tons in May, equivalent to 14.6 million bpd, according to data released on June 15 by the National Bureau of Statistics.
This was up 15.4% from the same month in 2022, and was the second-highest monthly total, eclipsed only by the 14.91 million bpd from March.
The volume of crude available to refiners was 16.37 million bpd, consisting of imports of 12.11 million bpd and domestic output of 4.26 million bpd.
Subtracting the refinery throughput from the total crude available leaves a surplus of 1.77 million bpd that was available for storages.
Over the first five months of the year China has added about 730,00 bpd to storages, roughly in line with the 740,000 bpd added over 2022 as a whole.
It’s worth noting that for the first five months of 2023 China’s crude oil imports are up 6.2% to the equivalent of 11.13 million bpd.
This is an increase of about 650,000 bpd from the same period in 2022.
That seems a fairly strong gain in crude imports, but another way of looking at the overall picture is to say that China’s flows into inventories, at 730,000 bpd in the first five months, have actually exceeded its increase in imports.
The final factor in China’s oil market is exports of refined fuels, which are up a strong 45.4% in the first five months of the year.
Exports of products were 26.79 million metric tons in the January-May period, up from 18.45 million metric tons in the same period last year.
Using BP’s conversion factor of 8 barrels of products per metric ton, exports in the first five months of this year are about 1.42 million bpd, up some 443,000 bpd from the 977,483 bpd in the same period in 2022.
If the flows into storage and the rise in product exports are factored in, suddenly the increase in China’s crude oil imports doesn’t look quite as bullish as it may first appear.
The question for the market is what Chinese refiners choose to do in coming months, and the answer will likely depend on what happens to crude prices, with movements in the physical market more important that those in paper trade.
If OPEC+ is successful in boosting prices by restricting output, it’s likely that Chinese refiners will trim back some of their crude imports and turn to inventories in order to meet any rise in domestic demand.
But if prices remain anchored around the $75 a barrel level, it’s likely that China will continue to import at fairly robust levels.
It’s also worth noting that the prices China pays for imports from Russia, Iran and Venezuela are largely disconnected from the rest of the global crude market, given these producers are selling at discounts because all are under Western sanctions of some form or another.
It’s therefore more important to look at what China is buying from other major exporters, such as de facto OPEC+ leader Saudi Arabia.
While state-controlled Saudi Aramco (2222.SE) is reported to have told North Asian refiners that they can receive full allocations for July-loading cargoes, several sources with knowledge of the matter said some Chinese state-owned refiners have requested lower supplies.
The opinions expressed here are those of the author, a columnist for Reuters.