China, the world’s top crude importer, is drawing on record inventories amassed earlier this year as refiners scale back purchases after OPEC+ supply cuts drove global prices above $80 a barrel, traders and analysts said.
Chinese refiners, led by Sinopec and PetroChina, have built a supply buffer using massive storage capacity constructed over the past decade that gave buyers flexibility to boost purchases when prices are low and cut back when oil becomes expensive.
Its ability to draw on vast stocks could undermine efforts by major producers, led by OPEC kingpin Saudi Arabia, to tighten supply and support prices, analysts said.
Tepid Chinese demand could weigh further on oil prices, with benchmark Brent having fallen 4 per cent from a six-month high of $87.55 in early August, weighed down by worries over China’s weakening economy.
China’s crude stocks have been rising since March, touching a historical high of about 1 billion barrels in late July, data compiled by data analytic firms Kpler and Vortexa showed, driven by lower prices and optimism about a fuel demand recovery after COVID-19 lockdown measures were lifted late last year, traders said.
Kpler and Vortexa data showed there were some draw outs in the first quarter.
Over the first seven months, China’s crude oil throughput was 14.69 million barrels per day (bpd), lower than the combined of 11.22 million bpd of imports and 4.21 million bpd of domestic crude output.
However, demand has disappointed, leading refiners to build up crude inventories and ramp up fuel exports.
“China built up the stocks to run them down when it wanted to avoid the overheated market of July-August,” said Kpler analyst Viktor Katona.
“As a tactical move, it worked well because they’ve avoided the $85+ per barrel environment for large-scale purchases.”
Adi Imsirovic, director at energy consultancy Surrey Clean Energy, estimated China bought about 750,000 to 1 million barrels bpd of crude just for storage in the first half of 2023.
“With prices at least $85 and above, China will not buy for storage,” he said.
“That will just cancel out what the Saudis are doing.”
Saudi Arabia extended an additional 1 million bpd voluntary production cut for a third month in September and said it could be extended again or even deepened.
But China is now destocking as refiners crank up production and cut imports in July. Kpler and Vortexa figure that inventories are down 13-30 million barrels from July’s peak. Still, stockpiles are at least 30 million barrels above year-ago levels.
“The size of the domestic crude stock is enough to service a thirsty refinery sector, more than enough to service a stalled economy and large enough to weather any more additions to this (oil price) rally without having to resort to panic spot buying,” said John Evans from oil broker PVM.
Traders said Chinese refiners have been slow to book spot crude cargoes arriving in October and November after Gulf producers hiked term prices for a third month and as spot premiums for Middle Eastern grades hit 6-month highs on tight supply.
China’s crude imports hit a 3-year peak of 12.67 million bpd in June, according official data. Citi analysts expect the imports to moderate to between 11 million to 12 million bpd.
Meanwhile, close to 1 million bpd of Chinese refining capacity is scheduled to shut for maintenance in the fourth quarter, dampening crude appetite, traders said.
Even as the window for Asian buyers to bring in U.S. crude remains open, Chinese buyers have booked only 14 million barrels for November delivery, a Singapore-based trader estimated, down from 22 million barrels in June, the highest in 2-1/2 years.
“The buying frenzy that we saw earlier this year has cooled down,” he said.