All Roads of oil Lead to China
Tuesday, May 22nd, 2018
In brief: Forget Iran, shale and Opec. The real action in the oil market is happening on the other side of the globe. Beijing has been shifting its oil purchases away from the Persian Gulf and toward Russia, the U.S., Brazil, Angola and Malaysia in recent years, but a sudden lack of Western buyers would be the perfect opportunity for Chinese refiners to get back into the market for Tehran’s crude.
The world is currently watching the growing tensions in the Middle East, and oil market analysts are guesstimating just how much Iranian oil supply the renewed U.S. sanctions could stifle.
Yet, the biggest story in oil markets this year may well take place far from the much-publicized tensions in the Middle East – namely China’s ever-growing oil demand.
The key oil demand growth center—China—has just beaten its own imports and refinery runs records, as refined oil product exports jump and domestic crude oil production hits seven-year-lows.
While all eyes are riveted on Iran and the Middle East, the pace of Chinese oil demand growth could be the most underappreciated story in oil markets right now, Bloomberg Opinion columnist David Fickling writes.
China’s oil demand growth has so far this year exceeded expectations, and Goldman Sachs, for example, says that growth could be even “higher than currently estimated”. According to Goldman, global oil demand growth in the first quarter of 2018 is likely to have seen the strongest yearly growth since the fourth quarter of 2010.
Current estimates by investment banks that see lowered Iranian and Venezuelan supply pushing up oil prices also assume that the global—and Chinese in particular—demand growth will continue to be strong.
So far this year, China has lived up to these expectations.
In 2017, China surpassed the United States to become the world’s top crude oil importer as its domestic production declined while it kept the title of world’s largest oil consumer for the ninth consecutive year, and while it expanded refining capacity, and reduced restrictions on oil imports and refined oil product exports.
The strong crude import pace continued this year, and in March Chinese crude oil imports hit their second-highest level on record at that time, while refined fuel exports also jumped to an all-time high, up by 43 percent compared to March 2017. China’s crude oil imports in the first quarter increased by 7 percent on the year to around 9.09 million bpd—a rise of almost 595,000 bpd on average compared to Q1 2017, according to Reuters calculations.
Refinery runs in March also jumped to a record as import quotas for the small independent refiners—the so-called ‘teapots’—were increased and refinery margins stayed healthy.
Chinese refineries processed 12.13 million bpd in March, beating the previous record of 12.03 million bpd from November 2017. Refinery runs in April and May are expected to be lower than the March record due to the peak maintenance season.
At the same time, China’s domestic crude oil production has been languishing near June 2011 lows in the first quarter this year, prompting higher imports to meet growing demand. Crude oil production in March was around 3.76 million bpd, flat compared with the average levels in January and February.
In April, Chinese crude oil imports set a new record—at 9.6 million bpd they beat the previous daily record of 9.57 million bpd from January this year. Steady refining margins and backlog cargoes to some independent refiners contributed to the record import volumes. Refined oil product exports soared 46 percent on the year in April, but eased from the all-time high in March.
China is crucial to global oil demand growth, and if it keeps its current growth pace, it would support the strong demand growth that analysts expect.
On the supply side, Iran’s impact on the global oil market has yet to be quantified or seen. The coming U.S. sanctions pushed up oil prices last week after President Donald Trump withdrew the United States from the nuclear deal.
Iran’s oil buyers continue to buy its crude, assessing the implications of the sanctions during the 180-day wind-down period. While European buyers flag concerns over the financing issues of trade with Iran as a potential stop to buying Iranian crude, China is reassuring Tehran that it will continue to import its oil.
As a supply loss in collapsing Venezuela and a potential decline in Iranian oil exports push oil prices up, the pace of demand growth in China could drive global demand growth higher. If demand growth continues to be strong—as currently expected—an already tight oil market could become even tighter amid geopolitical concerns, driving oil prices further up.
The yuan-denominated crude contract recently launched in Shanghai may be one of the easiest ways for Iran to get past U.S. sanctions, which are typically enforced when banks attempt to clear dollar-denominated trades in New York. Beijing has been shifting its oil purchases away from the Persian Gulf and toward Russia, the U.S., Brazil, Angola and Malaysia in recent years, but a sudden lack of Western buyers would be the perfect opportunity for Chinese refiners to get back into the market for Tehran’s crude.
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