China’s crude oil sector continues to show signs of weakness, with September marking the sixth consecutive month of declining refinery activity. This has resulted in nearly 1 million barrels of crude oil per day being available for storage.
Refineries in China processed 14.29 million barrels per day (bpd) of crude in September, a slight increase from 13.91 million bpd in August, but a 5.4% decrease compared to the same month in 2023, according to official data released on Friday.
The reduced refinery throughput followed a previous report indicating a 0.6% drop in crude imports for September compared to the previous year, totaling 11.07 million bpd. This marks the fifth consecutive month of lower imports than in 2023.
The fragility of China’s oil sector has led to significant volumes of surplus crude being available for storage in either commercial or strategic reserves.
Although China, the world’s largest crude importer, does not disclose specific volumes entering or exiting its strategic and commercial stockpiles, estimates can be made by comparing crude processing figures with total available crude from imports and domestic production.
Domestic crude production in September was 4.15 million bpd, a 1.1% increase compared to the same period last year, as reported by the National Bureau of Statistics.
Combining domestic output and imports results in a total of 15.22 million bpd available for processing. With refinery throughput at 14.29 million bpd, this leaves a surplus of 930,000 bpd.
For the first nine months of the year, the total volume of crude available was 15.25 million bpd, while refinery processing averaged 14.15 million bpd, resulting in a surplus of 1.1 million bpd.
It’s important to note that not all surplus crude has likely been stored, as some may have been processed in facilities not included in the official data. However, this would account for only a small fraction, meaning that China has consistently imported more crude than it needs for domestic consumption.
Price Movements
The reason behind these surplus imports may be tied to crude price movements. Chinese refiners tend to import more when prices are perceived as low, and scale back purchases when prices rise or increase too quickly.
In contrast, last September, Chinese refiners were drawing on inventories, processing 15.48 million bpd against an available supply of 15.24 million bpd, resulting in a deficit of 240,000 bpd. At the time, crude prices were surging, with Brent futures rising from $73.39 per barrel at the end of June to $97.06 by the end of September 2023.
This year, however, has seen a different trend in crude prices, with Brent dropping from a high of $92.18 per barrel on April 12, 2024, to a low of $68.68 on September 10. The price has since recovered to around $73.16 per barrel, a level that Chinese refiners likely find reasonable.
Chinese refiners are also likely building up inventories as a precaution against potential disruptions in the Middle East, which could impact crude shipments or lead to a sustained price risk premium.
However, China’s oil sector remains weak, and its frailty would be even more apparent if refiners weren’t purchasing surplus crude.
The data also casts doubt on OPEC’s forecasts for China’s demand growth, which project a rise of 580,000 bpd this year. This seems overly optimistic, considering that China’s imports are down by 350,000 bpd in the first nine months of the year.
