LAUNCESTON, Australia (Reuters) - One of the standout features of the crude oil market since the start of the coronavirus pandemic has been the extraordinary amount being stored by China.
But that stopped in October, at least temporarily.
A combination of record refinery processing and an easing of import volumes, as the last of the cheap crude bought during a brief price war in April was delivered, led to a likely small draw on inventories in October.
China doesn’t disclose the volumes of crude flowing into strategic and commercial stockpiles. But an estimate can be made by deducting the amount of crude processed from the total amount of crude available from imports and domestic output.
In October, China’s refineries processed 59.82 million tonnes of crude, equivalent to 14.09 million barrels per day (bpd), narrowly beating the previous monthly record of 14.08 million bpd set in June.
Crude oil imports were 42.56 million tonnes, while domestic production was 16.41 million tonnes, giving a total of 58.97 million tonnes - equivalent to 13.89 million bpd.
Subtracting the crude available from the refinery throughput leaves a gap of 200,000 bpd, suggesting that Chinese refiners drew this modest amount from storage tanks during October.
While the implied inventory draw is small, it does represent a dramatic reversal of the trend so far this year, especially in the middle two quarters of the year when the crude purchased during the April price war started arriving at Chinese ports.
In the first nine months of the year an estimated 1.83 million bpd flowed into stockpiles, with the 2.77 million bpd from June being the highest on record.
The massive volumes flowing into Chinese storage tanks have in some ways masked the true state of weak demand across the globe, caused by lockdowns as many countries tried to stop the spread of the coronavirus pandemic.
The Chinese buying spree came during a dispute between Saudi Arabia and Russia, the leading exporters in the group known as OPEC+, which resulted in benchmark Brent crude futures dropping to the lowest in 17 years.
While the price war only lasted a few weeks before a new output agreement was struck, it did give Chinese refiners the opportunity to gorge on cheap supplies - so much so that the resulting flood of crude led to queues of tankers waiting for up to several weeks to discharge at ports.
The last of the cheap crude is likely to be offloaded this month, but it was already tailing off in October, with customs figures showing only 10.02 million bpd being discharged, the lowest monthly total in the past six.
IMPORTS TO REBOUND
The question for crude oil markets is now that China has received the last of the cheap crude, will it run down bulging inventories, continue to buy for storage or simply match imports to refining demand?
While the small apparent draw in inventories in October may suggest Chinese refiners will use up stockpiled crude, it’s far too early to say for certain this is the case.
In fact, it appears that crude imports are likely to recover again in November. China will import an estimated 11.3 million bpd this month, according to preliminary estimates by Refinitiv Oil Research.
The rebound is on the back of higher imports from Saudi Arabia, after the kingdom cut its official selling prices, with Refinitiv estimating imports at 2.25 million bpd in November, up from 1.29 million bpd in October.
Another factor is higher imports from the United States: an estimated 1.07 million bpd are expected to be discharged in November, up from 490,000 bpd in October.
It may be the case that Beijing is trying to boost purchases of U.S. crude in an attempt to meet the terms of its so-called Phase 1 trade deal with Washington, which called for a dramatic increase in imports of U.S. crude, liquefied natural gas and coal.
Since the signing of the agreement in January, China’s imports of U.S. energy have come nowhere near the levels specified in the deal. But Beijing may be trying to show that it is making some effort ahead of the exit of defeated President Donald Trump and the January installation of his successor, Joe Biden.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Kenneth Maxwell
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