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China drew on crude oil inventories in December, unlikely to become a trend: Russell

  • Certainly, the start of the new year and with it the new crude import permits is likely to see January imports recover strongly from December's soft outcome.
19 Jan, 2021

LAUNCESTON: China appears to have drawn on its crude stockpiles in December, the second time in three months, as the world's biggest oil importer uses some of the massive surplus it built up last year.

China processed 1.24 million barrels per day (bpd) more crude oil in its refineries in December than was available from imports and domestic production, according to calculations based on official data.

China doesn't disclose the volumes of crude flowing into strategic and commercial stockpiles. But an estimate can be made by deducting the amount of crude processed from the total amount of crude available from imports and domestic output.

Refinery throughput was 14.13 million bpd in December, just shy of November's record 14.2 million bpd, according to data from the National Bureau of Statistics on Monday.

December crude imports were 9.06 million bpd, the lowest on a daily basis since September 2018 and well below the 11.03 million bpd in November.

Part of the pullback in imports was likely because some independent refiners had exhausted import permits for 2020, and also because the last of the huge volumes of crude purchased during last April's brief price war between top exporters Saudi Arabia and Russia was delivered by November.

Domestic production in December was 3.83 million bpd, giving a combined total of crude available of 12.89 million bpd, which was 1.24 million bpd below the volume processed by refiners.

There was a small draw of about 200,000 bpd on inventories in October, when total available crude was 13.89 million bpd and refinery throughput was 14.09 million bpd.

This was reversed in November, when total available crude was 14.91 million bpd, some 710,000 bpd above the 14.2 million bpd that was processed by refiners.

For 2020 as a whole, China added about 1.29 million bpd to inventories, an increase of 350,000 bpd, or 37%, from the 940,000 bpd added to strategic and commercial inventories in 2019.

Part of the increase in storage flows can be put down to the start of new refining units in China during 2020, which typically means a build up of operating inventories of about 21 days of throughput.

But this doesn't account for the bulk of the flows into storage, which most likely were used to bolster the Strategic Petroleum Reserve (SPR).

STRONG START TO 2021

Whether China will continue to buy crude for storage at the elevated rate seen in 2020 is questionable, given higher crude prices and the likelihood that the SPR is nearing capacity.

However, a pullback in storage flows doesn't necessarily translate into weaker crude oil imports, given the expansion of the refining sector.

If China were to average 14 million bpd of refinery processing in 2021, and if domestic output was to hold around the 2020 level of 3.89 million bpd, it implies that imports would be around 10.11 million bpd.

However, that assumes zero storage flows, and that is unlikely to be the case, suggesting that crude imports will be higher than 10.11 million bpd.

Certainly, the start of the new year and with it the new crude import permits is likely to see January imports recover strongly from December's soft outcome.

Refinitiv Oil Research estimates that January's imports will be around 11.38 million bpd, which includes some 706,000 bpd of crude that arrived in December, but wasn't discharged because refiners had run out of import permits.

What is likely to continue to be a feature of China's crude import patterns is that buying for storage will ramp up when Chinese refiners and the authorities deem crude prices to be reasonable, and ease when they consider them too high.

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