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Isaac Leung

Unlocking the Puzzle of China’s Oil Imports

by Isaac Leung | Dun & Bradstreet Editor

October 12, 2015 | No Comments »

China oil tanker shipChina’s crude oil imports are up 10% in 2015, despite dire headlines claiming the country’s demand for raw materials has peaked. China imported more crude oil than the US in April — for the first time ever — to reach an average of 6.6 million barrels per day (b/d) for the year to date.

At a time in which global commodities markets are swooning, how has China’s oil demand bucked the trend?

First, China’s refined fuel exports are growing — they were up 11.6% year-over-year by volume in January-August 2015. Refinery capacity has grown faster than product demand, forcing Chinese refiners to put product out on the world market.

A new factor in the Chinese market is the smaller, “teapot” private-sector refiner. Several received quotas for the first time in 2015 to import and refine crude oil — totaling 660,000 b/d — as part of a rare market reform in an upstream sector that enables refiners to use more capacity. In any case, higher fuel exports are accounting for up to 100,000 b/d of increased crude imports.

Second, China is storing as much oil as it can, at these prices. Data remain sparse and often fail to distinguish between state and oil company inventories. However, China’s reported strategic petroleum reserve is still likely to be substantially smaller than the International Energy Agency member countries’ mandatory 90 days of prior-year net oil imports.

By November 2014, in China’s most recent phase of building strategic reserves, stockpiled oil topped 91 million barrels or barely two weeks of import demand. In 2015 a second strategic-reserve-building phase has begun, with a target of 168 million barrels, including a facility in the eastern city of Qingdao. The pace of strategic purchasing will vary as China scrambles to secure storage space, but more storage was being contracted from the private sector as of late 2015.

Indeed, given the situation of Middle Eastern oil producers Iraq, Libya, Syria, and Yemen, building strategic reserves from their current low base seems advisable to China’s leadership and energy sector, especially given excess supply conditions. Problems in the region include an undeclared proxy war between a thermonuclear power and a major oil producer (Russia and Iran) on one side, and a NATO member and the world’s largest oil producer (Turkey and Saudi Arabia) on the other.

Consumer Trends

Though increasing demand for automobiles may seem strange given China’s slowing growth, driving is becoming more popular among Chinese consumers. Gas is more heavily taxed than in the US but is over 20% cheaper now than it was a year ago in 2014. Despite the lull in car purchases (which fell almost 7% year over year in July and will likely be down for the entire year compared to 2014) and the tough economic situation in parts of the country, the Chinese are getting into their cars and driving more.

Apparent demand for gasoline, as estimated by Platts China Oil Analytics, was up almost 22% January-August 2015, compared to the same period the year before. The trend is in contrast to muted demand growth for diesel fuel used in commercial transportation, construction, agriculture, and fisheries.

Demand for aviation fuel also was still growing in second half 2015, in line with increased domestic and international travel. Whether this trend can hold up as employment sputters and the yuan weakens is unclear. But the IEA expects Chinese gasoline demand for oil to be up almost 5% by the end of 2015.

Domestic Supply

Though domestic oil production rose by 3.8% in August, onshore production is sagging, and stabilizing it has only been achieved after massive expense and effort to eke out the most from China’s aging mainstay onshore fields. Most of the domestic growth has come from offshore production.

In late 2014 leading state-owned oil major CNPC made it clear that it would allow the giant Daqing oil field (accounting for one in five barrels produced domestically) to enter a process of decline. New fields in China face complex geology and high expense. Domestic supply is unlikely to reach much past 4 million b/d in coming years. This trend is already informing Chinese sourcing decisions and supporting imports.

The Mystery Explained

In all, it should be no surprise that Chinese oil demand has been increasing lately. Its refineries are exporting more, the government is stockpiling, drivers are driving more, and domestic supply is about to enter a phase of decline. Ultimately, though, one factor is the puppet master behind all these shifts: the price of oil.

Isaac Leung is a senior economist on D&B’s Global Data, Insight & Analytics team. Based in Marlow/United Kingdom, he covers China, India, and other parts of the Asia/Pacific region as a contributor to D&B Macro Market/Country Insight Products. His areas of interest include maritime economics. He has degrees from Cambridge University and the London School of Economics.

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