China’s seaborne crude imports came in at 11.4mbd in June, up more than 40% year-on-year and just shy of the unusually high imports in June 2020 when oil importers took advantage of attractive prices as the oil price war raged. Meanwhile, the country’s onshore crude inventories stood at 980mb at the end of June, only 20mb below the all-time high recorded in August 2020, and translated into an average stockpile rate of 1mbd in May and June.
The rapid stock build suggests relatively weak crude processing rates, as Shandong teapot refiners cut refining runs amidst restricted feedstock access due to customs inspections on old tankers and non-crude oil imports, while state-run companies underwent refinery turnarounds in recent months. Besides, a slower-than-expected rebound in the manufacturing sector continues to weigh on demand for diesel and petrochemicals, dragging on overall crude throughput.
Shandong customs start releasing heavy oil from commercial tanks
Chinese authorities recently rolled out a series of incentives to encourage teapot refiners to boost run rates. These include early issuance of a new batch of crude import quotas and re-permitting imports of diluted bitumen – a non-crude grade that smaller refiners usually use to import Venezuelan heavy oils – after months of inspection on crude cargoes declared as non-crude grades at the customs.
Shandong teapots without enough crude import quotas had difficulties securing feedstocks from spot markets as well as ex-tank deliveries, amidst the inspection on diluted bitumen imports since April, resulting in a near 25mb build in Shandong’s onshore crude inventories to a new record at the end of June.
The recent round of permission given to resume diluted bitumen imports – amid others including the condition that importers produce bitumen as main product – will help to ease the pressure at Shandong ports, releasing oil from tanks and pushing up teapots’ operating rates, as margins of processing heavily discounted diluted bitumen for gasoline and diesel as “side products” of bitumen are still attractive.
Tax on gasoline blending components benefits state-own refiners
Beside policy moves that benefit teapot refiners, China imposed consumption tax on alkylates, an important blending component for gasoline, equivalent to finished gasoline from end June, which will significantly dampen blending margins for private blenders and domestic supplies of blended gasoline. This, coupled with improving domestic demand for finished gasoline during school holidays, will help state-own refiners secure more market shares during the summer driving season, and may further curb the country’s gasoline exports in July.
China’s overall cargo exports for gasoline, diesel and jet fuel have strengthened y-o-y in the first six months of 2023, due to higher product export quotas, but were much lower than in Q4 2022, amidst bearish export margins and improving domestic margins, especially for gasoline.
Chinese refiners are expected to increase run rates somewhat after the maintenance season, amidst an improving domestic market on the back of recent incentives, and the high crude stocks will help refiners balance risks from crude supplies, including collective production cuts from oil exporting countries.