Column: China’s Weak Rough Imports, Pariah Buying Ease Global Market: Russell

Men walk past oil tanks at the factory of Liangyou Industry and Trade Co., Ltd in Qufu, Shandong province, China July 4, 2018. REUTERS/Jason Lee/File Photo

LAUNCESTON, Australia, Aug 23 (Reuters) – China is inadvertently helping ease tensions in the crude oil market by cutting imports and favoring shipments from exporters shunned by much of the rest of the world.

China, the world’s biggest oil importer, looks set for another soft August result, with Refinitiv Oil Research estimating arrivals at 8.33 million barrels per day (bpd).

That would be lower than the official customs data figure of 8.79 million bpd in July and 8.72 million bpd in June.

For the first seven months of 2022, China’s crude oil imports were 9.98 million bpd, down 4% from the same period last year.

Looking at the monthly data, it is clear that after a decent start to the year, China’s oil imports started to slump from June.

Several factors explain China’s recent weakness in crude oil imports.

Domestic fuel demand was hit by the strict COVID-19 lockdowns in several cities in the second quarter, and the relatively modest rebound in economic activity since they were largely lifted.

Refinery processing has also been weaker due to a lack of export quotas for products, meaning Chinese refiners have not been able to take full advantage of tight regional fuel markets, especially diesel.

High crude prices following Russia’s February 24 invasion of Ukraine likely also deterred oil buying, with Brent futures trading above $120 in May, at a time when June and July deliveries would have been arranged.

UNEXPRESSED BENEFITS

The question is, what would be the state of the global crude oil market if China had continued to import at the level it was in the first five months of 2022, namely more than 10 million bpd?

There is no doubt that the global market would have been significantly tighter and prices would have come under strong upward pressure.

Another factor to note is where China sources its crude oil, with a notable change in recent months.

Russia was China’s top supplier in July for a third month, with pipeline and tanker imports reaching 1.68 million bpd, according to customs data released Aug. 20. read more

Chinese refiners have been willing buyers of heavily discounted Russian crude, grabbing shipments that would likely have been destined for countries like Japan and South Korea before Moscow’s attack on Ukraine.

For the first seven months of the year, China’s imports from Russia totaled 1.67 million bpd, just behind the traditional top supplier Saudi Arabia’s 1.72 million bpd.

Chinese imports from Iran and Venezuela, both of which are under US sanctions, are a bit murkier.

China reported no purchases in July from either country, but its customs data lists imports of 787,000 bpd from Malaysia.

That figure is widely assumed by market participants to be mostly oil from Iran and Venezuela, especially since Malaysia’s total crude output has averaged below 600,000 bpd this year, the data shows. from the US Energy Information Administration.

Currently, the United States and other Western countries should turn a blind eye to Chinese imports from Iran and Venezuela, because if Beijing really bought zero barrels from both producers, it would significantly tighten the global market.

It’s also worth pointing out that China isn’t helping ease tensions in the global rough market out of sheer goodness of heart, rather it’s pure economics at work.

China buys cargoes from Russia, Iran and Venezuela at prices lower than what it would pay its other suppliers.

As long as these discounts are offered and customers for Russian, Iranian and Venezuelan crude are constrained by geopolitics, Chinese refiners will likely continue to buy.

Making the global rough market a little less tight is just a side benefit that no one really wants to talk about.

Editing by Christian Schmollinger

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