China’s imports of crude oil stayed above 11 million barrels per day (bpd) for a fifth straight month in September, something that sounds bullish for the market but in reality is far more likely to be bearish for coming months.
Official customs data released on Oct. 13 showed China imported 48.48 million tonnes of crude in September, equivalent to 11.8 million bpd.
This was up from 11.18 million bpd in August, but shy of the record 12.94 million bpd in June. However, the last five months have now been the five strongest on record.
While this looks bullish for crude markets on the surface, it’s important to understand why the world’s biggest oil importer has had such a ravenous appetite in recent months.
Simply put, Chinese refiners went on a buying spree during the brief price war between top exporters Saudi Arabia and Russia in April.
That price war, coupled with the economic hit caused by lockdowns to combat the spread of the novel coronavirus, sent global benchmark Brent crude to the lowest in 17 years in late April.
While the Saudis and Russians, and other members of the group known as OPEC+ soon reached an agreement to extend and deepen crude output cuts, the price war allowed China to gorge on cheap oil.
They did so to the extent that China’s ports and storage facilities were so overstretched that tankers were queuing for weeks waiting to discharge.
This is the main reason behind the record five months of imports, and also the main reason why imports may show a pullback in coming months.
October’s imports are likely to be the last impacted by the delayed offloading of the massive crude buying, with Refinitiv Oil Research estimating that about 2.7 million tonnes, or about 635,800 bpd, of “spillover” cargoes from September will be discharged in the month.
This will bring October’s imports to an estimated 10.9 million bpd, according to Refinitiv, which already represents a marked slowing from the previous five months.
Refinitiv also estimates that October-loading cargoes for China will be around 8.2 million bpd, down from the second quarter’s average of 11.9 million bpd, suggesting November arrivals will be lower than the current month.
What is likely in coming months is that China’s crude imports will return to something that may be described as “normal”, possibly the pre-coronavirus levels of around 10.5 million bpd.
A return to more normal levels for Chinese imports isn’t by itself bearish for crude oil prices, after all, China is the only major economy likely to show any economic growth in 2020 given its ongoing recovery from the COVID-19 pandemic.
But the pandemic is still affecting crude oil demand in the rest of Asia, with the next three biggest importers all struggling to re-ignite economic growth and thus oil demand.
India’s October imports are estimated by Refinitiv at around 3.53 million bpd, largely steady from 3.61 million bpd in September, but still below pre-pandemic volumes of around 4 million bpd.
Japan’s imports are likely to be around 1.9 million bpd in October, down from 2.42 million bpd in September, mainly as a result of several refineries undergoing maintenance.
South Korea is expected to offload 2.58 million bpd in October, up from 2.38 million bpd in September, and getting close to the pre-pandemic levels of around 2.7-3 million bpd.
What the numbers show is that China’s outsized crude appetite in recent months has been holding up overall demand in Asia.
With China likely to return to more normal levels from October onwards, the question becomes how quickly demand will recover in Asia’s other large consumers, and will it be fast enough to offset the loss of China’s excess imports?
Another point of pressure is that the OPEC+ group is taking a more bullish view of the market, with Russian Energy Minister Alexander Novak saying on Wednesday output curbs will be eased as planned despite a global spike in coronavirus cases.
OPEC+ plans to taper its output curbs from Jan. 1. The group is currently reducing production by 7.7 million bpd to help balance the market, support prices and reduce inventories.
Adding more crude into a market where the biggest buyer is moderating its intake and other major Asian importers have yet to fully recover, increases the risk that prices will come under pressure.