China’s crude quotas unlikely to spark soon import surge

China has issued full-year crude import quotas for 2024, rather than the usual practice of allocating 50-70% of the yearly allowance at the beginning of the year. This change is intended to stimulate imports, particularly since many teapot refiners exhausted their quotas in late 2023. However, Chinese state-run refiners, despite having unlimited crude quotas, also scaled back imports in the last two months of 2023 due to softened domestic demand. In December, China's seaborne crude imports rebounded slightly above the 10mbd mark, albeit extending the year-on-year decline for a second consecutive month. Simultaneously, the continuous draws in China's onshore crude inventories since late August slowed down in December. Total crude stocks on Dec 31 remained flat compared to a month ago, indicating persistent softness in the country's crude throughput.

 China crude imports by origin (mbd)

China’s discounted crude imports slow despite fresh quotas

In 2023, China set a record for importing Iranian crude and condensate, averaging 1.1mbd, marking a substantial 70% increase from the previous year. Shandong teapot refiners played a key role in driving this surge in purchases amidst tightness in other discounted feedstocks. This trend intensified after Venezuela diverted some supplies to the US, and Russia extended its supply cuts. However, this momentum faced headwinds in the last two months as teapot demand slumped due to narrowing refining margins and import quota shortages. China's Iranian oil imports reached just over 1mbd in December, a decline from the record 1.6mbd in October. Iranian barrels headed to non-Shandong areas also peaked in Q4 2023, with at least 30mb discharged at commercial storage hubs, waiting for order from Shandong teapots, as Chinese state-run refiners outside Shandong continue to exhibit reluctance to engage with the US-sanctioned oil. With ample Iranian crude storage in place and fresh import quotas allowing the draw of oil from port storage, China's demand for seaborne Iranian cargos may continue to soften in the coming months. This is particularly likely if Iran extends its more aggressive pricing policy emerging in late 2023.

China’s discounted feedstock imports (mbd) - Iranian crude, Venezuelan heavy oil, Russian crude, Russian fuel oil

Chinese oil majors may initiate the process of rebuilding crude stocks

While China's overall crude inventories hover around the 2-year average above 930mb in the week ending Jan 14, inventories under the control of Sinopec, China's leading state-owned refineries, dipped below 300mb in the same period. If the current rate of drawing stocks continues, Sinopec's inventories are projected to reach a 2-year low in March, just before the onset of spring refinery maintenance. The necessity to rebuild inventories might incentive Sinopec to boost crude imports in the near term.

China onshore crude inventories – total vs. Sinopec-owned (mb)