Column: China's crude oil stockpiling surges amid weak refinery output

Men walk past oil tanks at the plant of Liangyou Industry and Trade Co., Ltd in Qufu
Men walk past oil tanks at the plant of Liangyou Industry and Trade Co., Ltd in Qufu, Shandong province, China July 4, 2018. REUTERS/Jason Lee/File Photo

LAUNCESTON, Australia, June 16 (Reuters) - China added crude oil to storage tanks at the fastest rate in two years in May as the amount processed by its vast refining sector dropped by the most in a decade.

China, the world's biggest crude importer, added about 2.23 million barrels per day (bpd) to commercial or strategic inventories in May, accelerating from the 2 million bpd seen in April, according to calculations based on official data.

It was the biggest stockpile build since the 2.81 million bpd added in June 2020, which came at a time global benchmark Brent crude had slumped to the lowest in 21 years amid the initial outbreak of the coronavirus pandemic and a brief price war between top exporters Saudi Arabia and Russia.

For the first five months of 2022, China added about 1.19 million bpd to crude storages, roughly matching the pace from 2020, when 1.26 million bpd were stockpiled over the year.

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 total amount of crude available from imports and domestic output from the amount of crude processed.

Crude imports were 10.79 million bpd in May, while domestic output was 4.14 million bpd, giving a combined total of 14.93 million bpd available to refineries.

Refinery throughput was 12.7 million bpd in May, a drop of 10.9% from May last year, which was the biggest decline in at least a decade.

Taking the refinery processing from the available crude leaves a gap of 2.23 million bpd.

The buildup of crude inventories in 2022 is markedly different in character to what occurred in 2020.

This year, the stockpiling is a reflection of weak refinery processing amid soft domestic fuel demand caused by Beijing's strict zero-COVID policy that has led to several lockdowns in major cities, including the financial hub Shanghai.

Pollution controls also limited refinery throughput in the first quarter, while regulated retail fuel prices mean that refiners have had margins squeezed as crude prices have risen at a faster pace than the domestic selling prices of fuels such as diesel and gasoline.

Refineries have also been largely unable to take advantage of record high profits for making diesel in Asia, as Beijing has restricted the amount of fuel allowed to be exported by lowering quotas. read more

China crude available vs refinery runs


China only allows exports of refined products under official quotas, mainly granted to large state-owned refining companies and not to smaller, independent companies where much of China's spare refining capacity is held.

A total of 17.5 million tonnes of export quotas have been issued in 2022, however, this is 41% lower than the 29.5 million tonnes issued in the first tranche last year.

The lack of quotas is showing up in export data, with China shipping out 3.27 million tonnes of refined products in May, down 40% from the same month a year earlier. For the first five months of 2022, refined fuel exports are 38.5% below the same period in 2021.

It is likely that with most COVID-19 lockdowns being eased domestic fuel demand will improve in coming months, leading to an increase in refinery throughput.

There are already signs that China's independent refineries, which account for about 20% of its oil imports, are starting to boost processing rates, with market estimates that they will be using about 70% of capacity by end-June, up from about 60% in May. read more

Independent refiners are also said by traders to be seeking Russian crude, given the steep discount it is being sold at in the wake of Russia's Feb. 24 invasion of Ukraine, which has led refineries in Europe, Japan and South Korea cutting purchases.

While independent refiners are likely to boost crude oil imports and fuel production in coming months, there is a question mark over whether the much bigger state-owned refiners will do the same.

It seems clear that they have been buying more crude than they need, and they are also unlikely to be able to boost fuel exports, unless Beijing relents and issues more quotas.

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

Editing by Robert Birsel

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Clyde Russell is Asia Commodities and Energy Columnist at Reuters. He has been a journalist and editor for 33 years covering everything from wars in Africa to the resources boom and its current struggles. Born in Glasgow, he has lived in Johannesburg, Sydney, Singapore and now splits his time between Tasmania and Asia. He writes about trends in commodity and energy markets, with a particular focus on China. Before becoming a financial journalist in 1996, Clyde covered civil wars in Angola, Mozambique and other African hotspots for Agence-France Presse.