April 11, 2014 / 3:06 AM / 3 years ago

COLUMN-China Q1 oil imports strong, but March softness shows likely path: Clyde Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Clyde Russell

LAUNCESTON, Australia, April 11 (Reuters) - The problem with China's crude oil trade data so far this year is that the same set of numbers can tell different and seemingly contradictory stories.

The 8.3 percent rise in China's crude imports to 6.60 million barrels per day (bpd) in the first quarter certainly looks robust, and at odds with other indicators of softer economic growth.

But the March numbers show imports fell 7.8 percent from February, and at 5.54 million bpd were the weakest since October last year.

The easiest reason to cite is that oil imports retreated in March after two exceptionally strong months at the start of the year, including the record 6.63 million bpd in January.

While it is likely that March imports were muted because of adequate supplies in the wake of the strong January and February imports, this isn't a sufficient explanation by itself.

There are two other factors at work, one largely visible and the other more speculative.

The known factor is that China's refiners have been exporting some of the additional crude imports as refined fuels.

The March breakdown of refined product imports and exports will only be available in about two weeks, but the figures for the first two months show strong gains in exports.

Light diesel exports rose 22 percent to 89,867 bpd, while those for gasoline increased 11 percent to 98,937 bpd, according to customs data.

It's likely this trend continued in March, with exports of all products rising 4 percent from the same month a year earlier.

China actually became a net product exporter in March, shipping out a net 370,000 tonnes. According to a Citi research note, this is only the third month that this has occurred since data started in 2004, the other occasions being December 2009 and January 2010.

However, it's possible that China will be a net product exporter, or close to it, for several more months, as refining capacity is running ahead of domestic demand growth.

Another reason for lower net product imports in the first quarter is weaker demand for fuel oil, the biggest slice of imports.

The reason for this is twofold, firstly the smaller refineries, known as teapots, which use fuel oil as a feedstock have been battling weak margins and have been limiting runs.

Secondly, the bigger of the teapots are winning crude import quotas, so they are cutting the use of fuel oil.

STORAGE FLOWS

The less visible explanation for China's crude oil import growth is the likelihood that substantial volumes have been put in commercial or strategic storage.

Refinery throughput for the first two months of the year was 9.75 million bpd, a drop of 1 percent on the same period a year earlier. March data isn't yet available.

However, crude imports for the first two months of the year averaged about 6.36 million bpd, and domestic output was about 4.2 million bpd.

This means there was about 10.56 million bpd of crude available for refining, but with only 9.75 million bpd actually processed, it leaves 810,000 bpd unaccounted for.

Part of this surplus can be put down to the start up of two new refineries, with a combined capacity of 440,000 bpd, at the beginning of the year.

Given that most refineries operate with around 21 days of crude as a working inventory, this means that the two new plants would have imported around 9 million barrels to ensure sufficient working stocks.

However, the buying of crude for commercial inventories still likely isn't enough, and there is the possibility that oil flowed into strategic storage as well, although this information isn't disclosed by the authorities.

It has also been reported that inventories of refined products also increased recently, with gasoline stocks jumping 10.4 percent in February from a month earlier, while those for diesel surged 20.5 percent.

Put it all together and the picture that emerges is one where the headline strength in crude imports is deceiving, given the likely flows into storage and the increase in exports of refined products.

Assuming commercial inventories are now satisfied, and adding in the upcoming refinery maintenance season, it's likely that crude imports in the next few months should be more like March's soft figure, and less like the strength seen in the first two months.

Editing by Richard Pullin

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