China’s imports of crude oil stumbled in May, and while the loss of Iranian cargoes offers a convenient explanation, there are other reasons to be cautious over the strength of demand in the world’s biggest oil importer.
China brought in 9.47 million barrels per day (bpd) in May, a drop of 11% from April’s record 10.64 million bpd, according to calculations based on customs figures released on Monday.
What appears to have happened is that Chinese refiners stocked up on imports from Iran in April, ahead of the expiry in May of the U.S. waivers that had allowed Iran’s top eight customers to continue buying crude.
Vessel-tracking and port data compiled by Refinitiv bears this theory out, with China importing about 800,600 bpd from Iran in April, but just 255,000 bpd in May.
It’s also worth noting that of the four Iranian cargoes that arrived in China in May, three left in April, prior to the expiration of the U.S. waivers.
Only one cargo departed in May in violation of the sanctions on Tehran imposed by the administration of U.S. President Donald Trump.
There is always a caveat, however, when talking of Iranian crude exports, and it is that the data only shows cargoes that are visible to the tracking systems and not any vessels that may be operating in the shadows.
The loss of Iranian cargoes, though, doesn’t explain the entire drop in China’s crude imports in May from the previous month, and it’s here that other data may be instructive.
Major Chinese refineries closed several refining units in May, which would have crimped crude appetite.
It’s also likely that much of the build-up of commercial inventories for the commissioning of Hengli Petrochemical Co’s new 400,000 bpd refinery was completed.
A further bearish factor for Chinese crude demand was the drop in exports of refined products in May, possibly as a result of falling margins for fuels such as diesel and gasoline.
Exports of refined products dropped to about 1.16 million bpd in May from about 1.65 million bpd in April.
Refinery margins in Asia have come under pressure from higher crude costs and soft demand growth, with the profit for a Singapore refinery holding around $3 a barrel in May, well below the 365-day moving average of $4.34.
The other factor that is harder to quantify is just how much of Chinese crude oil is going into strategic and commercial storage, especially since the authorities only very occasionally release limited details about China’s national reserves.
One way of looking at flows into storage is to take the total amount of crude available from domestic production and imports and subtract from that the amount processed by refineries.
Data for May will only be available later in June, but for the first four months of the year, crude imports were 10.03 million bpd, and domestic output was 3.83 million bpd, giving a total of 13.86 million bpd available.
Refinery runs for the first four months of the year were 12.62 million bpd, up 4.7% on the same period in 2018.
This means 1.24 million bpd of crude that was available wasn’t processed in the first four months of the year, implying robust flows into commercial and strategic stockpiles.
It’s possible Chinese refiners and Beijing authorities may scale back some of the buying for stockpiling given the tightening of crude oil supply in recent months.
In addition to the loss of Iranian barrels, U.S. sanctions have also cut shipments from Venezuela.
The Organization of the Petroleum Exporting Countries (OPEC) and allied producers including Russia have also been restricting output in a bid to strengthen crude prices.
Much of the output being reduced by OPEC is of the heavier crude grades favoured by many Chinese refiners, and it’s possible that the efforts of OPEC and its allies have disproportionately fallen on China.
Finally, the trade dispute with the United States may be undermining demand for certain oil products in China, with petrochemical demand likely to suffer if plastic-intensive manufacturing suffers from a slowdown in exports.