China’s implied crude consumption showed a massive gain in February from January levels, as domestic demand for gasoline and jet fuel has surged since 2H January, after China dropped its zero-Covid policy and shifted to a full re-opening of its economy.
In addition, Chinese state-run refiners have also resumed imports of Russian crude after a brief pause last year-end, while smaller independent refiners are stepping up imports of Russian fuel oil to improve refining margins, and also cope with lower supplies of Venezuelan heavy crude.
Improving domestic demand boost refining runs, reduced product exports
China’s seaborne crude imports stood shy of 9.8mbd in February, up 0.6mbd from January’s 4-month low, as refiners were not prepared for a strong uptick in fuel demand during the Chinese New Year travel season following the sudden removal of travel restrictions. The country’s onshore crude inventories, meanwhile, declined by 35mb month-on-month in February. The incremental crude imports and draw on onshore inventories translated into a 1mbd increase in the country’s crude throughput, mostly seen among non-Shandong refiners as state-run PetroChina and Sinopec refiners were required to secure the country’s fuel supply during and after the national holidays.
Improving domestic fuel demand, coupled with cooling export margins, have also weighed on China’s product exports, despite the first batch of product export quotas issued this year being up nearly 50% from the same batch last year. Market participants are projecting that China may cut exports further by 50% m-o-m in March, in lieu of a requirement on state-run refiners to maintain sufficient oil stockpiles during the country’s National People’s Congress and the Chinese Political Consultative Conference (NPC & CPPCC). With domestic margins surpassing exports’, refiners will also prioritise selling fuel to the domestic market.
Although China’s crude throughput is unlikely to rise further in March, market participants expect China’s crude consumption to pick up in 2H 2023, after the Q2 peak refinery maintenance season, with a 0.6 – 1mbd year-on-year growth for 2023.
Chinese refiners scramble for discounted Russian oil to improve margins
Crude imports into China are showing a preliminary gain in March, led by Russian barrels, as state-run refiners resumed purchases of Urals crude from Russia’s European ports, which also encouraged some new buyers to start importing the discounted barrels. With more Russian Urals crude in transit towards the East, and the majority of March-loading Far East barrels targeting Chinese independent refienrs, China’s seaborne crude imports from Russia may surpass 1.4mbd in March, exceeding the previous record of 1.3mbd seen in June 2020.
Both state-run and independent refiners have only bought Russian oil on a delivered basis, relying on middlemen to handle payments to producers, as well as arrange for freight and insurance, as Chinese ship owners have stayed away from Russian business to avoid breaching sanctions.
Besides Russian crude grades, Shandong independent refiners also increased purchases of Russian-origin fuel oil, including barrels stored on floaters offshore Singapore to mask the country of origin. While the discounted residual feedstock improved refining margins for the Shandong refiners, their refining run rates barely picked up in February (OilChem). Some refiners even have ample crude import quotas for the year, but chose to process fuel oil instead. Total high sulphur fuel oil imports into China are estimated at 400 kbd in February, nearly double the levels seen last year, and the momentum is expected to continue as the discounts for these distillate-rich barrels remain attractive.
State-run refiners tap on term supplies to balance Russian share
China’s imports of Russian crude are expected to cool in April, on account that Russia could be cutting back on its Urals exports, and Indian refiners may have purchased a record volume of April-loading Far East cargoes, based on market discussions. State-run refiners are also reported to have purchased more Middle East barrels to fulfill their term contracts, supported by warmer political ties between China and the Middle East, in addition to ramping up imports from North America. Nonetheless, Russian oil will remain competitive to maintain its market share in China, especially in lieu of its limited pool of buyers.