China’s crude imports disappoint. Is a recovery in sight?

China’s crude imports disappoint. Is a recovery in sight?

China’s April oil import figures have declined from March’s peak, along with other economic signals. Has the market been overoptimistic on China’s recovery?

04 May, 2023
Emma Li
Emma Li, Senior Market Analyst

China’s seaborne crude imports came in shy of 10mbd in April, down more than 10% from the 30-month high in March, as more state-owned and independent refiners started turnarounds last month and a fresh round of customs inspections on crude imports delayed discharges.

The country’s domestic demand has shown a steady recovery in the first quarter, and in the recent week has been boosted by the Labour Day holidays, as travel activity rose in the country’s first restriction-free Golden week after more than three years.

But China’s recovery has been slower than expected, and its outlook remains uncertain. The country’s April PMI showed the first contraction since December 2022, as manufacturing activities slowed. The Q2 fishing ban and still weak commercial vehicle activities between warehouses and ports are further weighing on the country’s domestic demand. Coupled with refinery maintenance ramping up this month, crude imports into the country may have little upside in the near future.

Oil majors crowd out teapots for discounted Russian crude

Russia (including pipeline delivery) remained as the top crude supplier to China with 1.3mbd of seaborne crude discharged into the country in April. Some bigger independent refiners outside the Shandong Province started tapping on discounted Russian crude to boost refining margins, after state-owned oil majors renewed their interests in Russian crude in recent months.

Indian refiners also stepped up purchases of ESPO blend, leading to tighter Russian crude supplies to Shandong, with ESPO blend imports alone declining more than 40% m-o-m, forcing the smaller teapot refiners to look for alternative feedstocks.

Customs inspections hinder teapots’ diluted bitumen imports

Besides discounted Iranian crude and condensate that are usually rebranded as non-Iranian crude grades, teapot refiners also stepped up to process Iranian super heavy crude, which may be relabelled as non-Iranian diluted bitumen to bypass crude import quotas and also help to cope with surging bitumen demand in recent months.

This resulted in record imports of heavy feedstock by the teapots from Iran and Venezuela in March, as well as a new round of customs inspections on mislabeled crude imports, as more than half of these heavily discounted barrels were declared as diluted bitumen at customs in Q1 this year, data from customs statistics suggested.

The inspection dealt a blow on the teapots’ non-crude imports in April, with at least 13mb of heavy oil on twelve tankers anchoring off Shandong for more than two weeks, as many of the cargoes initially declared as diluted bitumen are detained for lab test.

Market participants have suggested that Iranian Soroosh crude (density 0.94) and Pars crude (density < 0.92) that are declared as diluted bitumen would be judged as fraudulent, as the grades differ from Venezuelan heavy crude grades, which have densities above 0.96.

The delays at Shandong ports may cause further reductions in already low operating rates among the teapots, and ultimately reduce the teapots’ crude imports.

Uncertainty on diluted bitumen imports may also encourage purchases of straight-run fuel oil and residual FO, with Russian barrels dominating the segment in recent months, including and in addition to barrels stored on floaters offshore Singapore before headed for China.

Early issuance of product quotas helps oil majors capitalise on export economics

China will likely issue the second batch of export quotas for oil products in early May, at least one month earlier than in previous years, as the Beijing government attempts to provide oil majors more flexibility in planning their exports for the rest of the year.

Compared to the unexpected 15mt in the last batch for 2022, the quotas issued this round will likely hover around 10mt, such that the total quota issued for the year will be less than last year’s, as China aims to stick to its carbon emissions control goals.

In addition, early issuance of quota is unlikely to trigger an immediate surge in refining run rates or exports this time as export economics are not supportive.

Although China-bound crude loadings from US Gulf more than doubled m-o-m to 950kbd in April, due to Brent-WTI spread widening over $6/b before the trading weeks for April-loaders, China’s crude loadings from Middle East Gulf – the baseloads for its oil majors – declined in the past two months. This suggests that a marked rebound in crude imports is unlikely in the near term.

Emma Li
Senior Market Analyst
Emma Li