China’s Oil Inventories Boom With Discount Russian Crude

China has gobbled up a record amount of Russian crude, adding some 2 million bpd to its strategic and commercial inventories last month.

This is the highest rate of inventory additions in three years, according to Reuters’ Clyde Russell. It is also an indication that the world’s second-biggest consumer of crude is insuring against the risk of supply shortages.

This is happening as analysts expect Saudi Arabia to extend its 1-million-bpd voluntary production cut and as Russia’s flagship Urals blend tops the Western price cap of $60 per barrel.

China’s crude oil imports hit a near-record last month, soaring by a whopping 45.3% on the year to 12.67 million barrels daily, data from the Chinese customs authorities cited by Reuters showed. The total for the month stood at 52.06 million barrels, which was the second-highest monthly oil import figure ever recorded by Beijing.

With these figures, it would be sensible to suggest that China is filling up its storage facilities both as insurance against undersupply and as a potential tool to control prices by releasing some of that oil, should the need arise.

Yet while imports were rising to near-record levels and inventories were filling up thanks to these imports, Chinese refiners were also ramping up processing rates.

Reuters’ Russell reports that refiners in China processed some 14.83 million barrels daily in June, or a total of 60.95 million tons, which was an increase of 10.2% on the year and, like June imports, the second-highest monthly figure on record.

Yet it is notable that even with higher processing rates, there was a lot of crude to be sent into storage, providing China with potentially significant leverage in case prices move higher than Beijing’s comfort threshold.

This is quite likely to happen if Saudi Arabia does indeed extend its oil production cuts beyond August. According to some analysts, the reason is that Riyadh needs oil at $100 per barrel to balance its books, but others believe it might start relaxing the cuts in September, possibly restoring half of the 1 million bpd in production.

“There’s ample evidence for Saudi Arabia to start unwinding the cuts in September. The market is screaming out for these barrels, and refiners are scrambling to get hold of them,” an FGE analyst told Bloomberg, suggesting market players are beginning to shift their focus from the Fed and other central banks to the supply side of the global oil equation.

Some in the analytical field note that Saudi Arabia would not relax its cuts unless it sees evidence that China is taking steps to accelerate economic growth. If import and storage rates are any indication, the evidence is already there, along with the latest pledges from Beijing to boost consumption and provide further support to the country’s struggling real estate sector.

Talk about a slowdown in U.S. oil production growth also has analysts and traders worried about supply, especially with forecasters seeing a deficit developing in oil markets in the second half of the year. Goldman, the latest to update its expectations, said record demand for oil will drive prices higher over the next six months while supply tightens further.

“We expect pretty sizable deficits in the second half with deficits of almost 2 million barrels per day in the third quarter as demand reaches an all-time high,” the bank’s head of oil research, Daan Struyven, told CNBC earlier this month.

In such a context, China, which has been known to anticipate supply squeezes in commodities, is doing what it has done before: it is stocking up on oil while it’s relatively cheap.

What it would do with that oil is another question, and the answer would depend on the state of international oil markets in the next six months. A 2-million-bpd deficit, if it materializes, could be quite a strong incentive to sell some oil from storage and lower prices.