(The opinions expressed here are those of the author, a columnist for Reuters.)
LAUNCESTON, Australia, Dec 9 (Reuters) - China’s record imports of crude oil in November underscore both the challenges and risks facing OPEC and its allies as they attempt to drive prices up by deepening output cuts.
The market often focuses on the Organization of the Petroleum Exporting Countries and its allies, including top exporter Russia, because the group holds regular meetings that capture the attention of the media and allow for considerable commentary over what the group is planning.
A case in point was the OPEC+ group’s decision at its Dec. 6 meeting in Vienna to deepen output cuts by 500,000 barrels per day (bpd), with number one exporter Saudi Arabia leading the way by trimming an additional 400,000 bpd more than its quota.
What receives less attention is the fact that for 2019 the demand side of crude oil is almost entirely a China story.
China’s imports of 11.13 million bpd in November were a record high on a daily basis, and brought imports for the first 11 months of the year to 10.09 million bpd, up 10.4% from the same period in 2018.
With 11 months of the year completed, China’s imports are running at about 957,000 bpd more than for the same period last year.
Given that the International Energy Agency (IEA) forecasts total global oil demand to increase by about 1 million bpd for 2019, it’s clear that without China’s ravenous crude appetite, the demand side of the equation would be extremely weak.
The new OPEC+ measures mean the total output cut from the group, which accounts for about 40% of world’s crude production, is 1.7 million bpd, and potentially higher with the extra Saudi commitment.
The move, if successfully implemented, will tighten the global crude oil market, but doubts remain as to whether prices will move substantially higher, or whether what OPEC+ is effectively doing is putting a floor on how low the price can fall.
How Chinese refiners respond to the OPEC+ move will also have ramifications as to whether the output restrictions will deliver higher prices, or at least prevent them from sinking.
There are largely two elements to China’s rising crude oil imports, namely the ongoing efforts to build strategic and commercial storages, and secondly the sharp rise in refining capacity as new plants have come on stream.
China doesn’t disclose the amount being held in its strategic petroleum reserve (SPR), but in the wake of the September attack on Saudi Arabia’s oil facilities, an official said China had about 80 days worth of stockpiled crude.
This puts China close to achieving the IEA recommended level of 90 days of import cover, but it’s not certain that China will stop stockpiling when it reaches that level, or whether it will continue to build inventories.
What is likely is that some point in the future, and perhaps as early as the first half of next year, China’s crude imports for stockpiling will ease.
China doesn’t release details of how much crude is being stockpiled, but an estimation can be made by subtracting the amount of crude refined from the amount available from imports and domestic output.
On this basis it appears that around 880,000 bpd were being added to either the SPR or commercial stockpiles in the first 10 months of the year.
This means that any tailing off in stockpiling may act as a brake on China’s crude import growth, and serve to undermine the OPEC+ output cuts.
The other factor is China’s increase in refining, which for the first 10 months of 2019 was 12.9 million bpd, up 6.4% from the same period a year earlier.
Some of the additional fuels produced go toward meeting domestic demand, but there are also increasing exports.
In the first 11 months of the year China’s exports of refined products totalled 60.22 million tonnes, up 14.2% from the same period a year earlier.
This equates to about 1.44 million bpd of products, using the BP Plc conversion factor of 8 barrels of products per tonne of crude oil.
China’s exports of refined products are about 180,000 bpd more in the first 11 months of the year compared to the same period in 2018.
It’s possible that China will continue to see solid growth in crude imports, but also strongly rising exports of refined products.
Assuming steady world demand for products, this means that China’s fuel exports will simply act to displace supplies from other countries that export refined fuels.
Overall, while the focus on supply moves by OPEC+ is important, it will be equally useful to monitor China’s crude imports and fuel exports, as any shift in the established patterns may have a bigger influence on the global supply-demand balance than the efforts of producers cutting their output.
Editing by Christopher Cushing
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